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Corporate governance and cash policies of multinational corporations

  • Beuselinck Christof`
  • Deloof Marc
  • Vanstraelen Ann


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

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Paper provided by Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) in its series Research Memorandum with number 013.

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Date of creation: 2012
Date of revision:
Handle: RePEc:unm:umamet:2012013
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