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Corporate governance and cash policies of multinational corporations

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  • BEUSELINCK, Christof
  • DELOOF, Marc
  • VANSTRAELEN, Ann

Abstract

This study investigates cash policies of multinational corporations (MNCs) for a large sample of European MNCs and their subsidiaries in the period 1998-2004. The results are consistent with the hypothesis that cash holdings depend on a trade-off between the superior knowledge of the subsidiary over headquarters and the agency costs of discretionary behavior by the subsidiary’s management. We find that foreign subsidiaries hold more cash than domestic subsidiaries, although geographical distance from headquarters does not seem to matter. Horizontal subsidiaries hold more cash than vertical subsidiaries. Furthermore, we find that subsidiaries hold more cash if they are located in a country with better law enforcement and lower corruption. This result is consistent with the argument that better corporate governance in the subsidiary country reduces the risk of expropriation by the subsidiary management. Finally, the availability of external finance in the subsidiary country reduces the level of subsidiary cash holdings.

Suggested Citation

  • BEUSELINCK, Christof & DELOOF, Marc & VANSTRAELEN, Ann, 2011. "Corporate governance and cash policies of multinational corporations," Working Papers 2011020, University of Antwerp, Faculty of Applied Economics.
  • Handle: RePEc:ant:wpaper:2011020
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    Keywords

    Cash holdings; Multinational corporations; Parent-subsidiary relationship; Shareholder protection; Law enforcement; Europe;

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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