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Corporate Liquidity

Author

Listed:
  • Dittmar, Amy
  • Mahrt-Smith, Jan
  • Servaes, Henri

Abstract

Agency problems are an important determinant of corporate liquidity. For a sample of more than 11,000 firms from 45 countries, we find that corporations in countries where shareholders rights are not well protected hold up to twice as much cash as corporations in countries with good shareholder protection. In addition, when shareholder protection is poor, factors that generally drive the need for liquidity, such as investment opportunities and asymmetric information, actually become less important. These results strengthen after controlling for capital market development. In fact, consistent with the importance of agency costs, we find that managers actually hold larger cash balances when capital markets are better developed. Our evidence indicates that investors in countries with poor shareholder protection cannot force managers to disgorge excessive cash balances.

Suggested Citation

  • Dittmar, Amy & Mahrt-Smith, Jan & Servaes, Henri, 2002. "Corporate Liquidity," CEPR Discussion Papers 3499, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3499
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    References listed on IDEAS

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    Cited by:

    1. Mike Burkart & Konrad Raff, 2015. "Performance Pay, CEO Dismissal, and the Dual Role of Takeovers," Review of Finance, European Finance Association, vol. 19(4), pages 1383-1414.
    2. Roc Armenter & Viktoria Hnatkovska, 2011. "The macroeconomics of firms' savings," Working Papers 12-1, Federal Reserve Bank of Philadelphia.
    3. W. Allard Bruinshoofd & Clemens J. M. Kool, 2004. "Dutch corporate liquidity mangement: New evidence on aggregation," Journal of Applied Economics, Universidad del CEMA, vol. 7, pages 195-230, November.
    4. Jose M. Berrospide & Ralf R. Meisenzahl & Briana D. Sullivan, 2012. "Credit line use and availability in the financial crisis: the importance of hedging," Finance and Economics Discussion Series 2012-27, Board of Governors of the Federal Reserve System (U.S.).
    5. Acharya, Viral & Almeida, Heitor & Ippolito, Filippo & Perez, Ander, 2014. "Credit lines as monitored liquidity insurance: Theory and evidence," Journal of Financial Economics, Elsevier, vol. 112(3), pages 287-319.
    6. Tom Aabo & Marianna Andryeyeva Hansen & Christos Pantzalis, 2012. "Corporate foreign exchange speculation and integrated risk management," Managerial Finance, Emerald Group Publishing, vol. 38(8), pages 729-751, June.
    7. Heitor Almeida & Murillo Campello & Michael S. Weisbach, 2002. "Corporate Demand for Liquidity," NBER Working Papers 9253, National Bureau of Economic Research, Inc.
    8. Nguyen, Pascal, 2012. "The impact of foreign investors on the risk-taking of Japanese firms," Journal of the Japanese and International Economies, Elsevier, vol. 26(2), pages 233-248.
    9. Filippo Ippolito & Ander Perez, 2012. "Credit Lines: The Other Side of Corporate Liquidity," Working Papers 618, Barcelona Graduate School of Economics.
    10. Hetland, Ove Rein & Mjøs, Aksel, 2012. "Credit Shocks Harm the Unprepared - Financing Constraints and the Financial Crisis," Discussion Papers 2012/11, Norwegian School of Economics, Department of Business and Management Science.
    11. Kimie Harada & Pascal Nguyen, 2011. "Ownership concentration and dividend policy in Japan," Managerial Finance, Emerald Group Publishing, vol. 37(4), pages 362-379, March.
    12. Campello, Murillo & Graham, John R. & Harvey, Campbell R., 2010. "The real effects of financial constraints: Evidence from a financial crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 470-487, September.

    More about this item

    Keywords

    cash holdings; corporate liquidity; shareholder rights;

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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