This study has investigated the empirical determinants of corporate cash holdings among the US, the UK, Germany, and France. According to previous empirical studies, four main factors affect corporate cash holdings: country-level governance, investment opportunities,
financial constraints, and firm specifics. In the present paper, we divide our sample into two groups by different national legal systems [i.e., the common-law countries (United States and United Kingdom) and the civil-law countries (Germany and France)], and focus on the effect of the country-level governance to corporate cash holdings.
We expect that firms in the common-law countries have more cash holdings than those in the civil-law countries for two reasons. First, because the stockholders of firms in the common-law countries have high shareholder rights to monitor managers and to reduce agency problem between managers and stockholders, firms can hold more cash holdings for their precautionary motives. Second, firms in the common-law countries with better legal protection to investors have low financial constraints; thus, they have an opportunity to earn more cash without giving up any good investment opportunities that are beneficial.
Our research reveals that country-level governance is significantly positive to corporate cash holdings, and the common-law countries with better country-level governance have more cash holdings than those in the civil-law countries with weaker country-level governance.
Furthermore, to avoid possible spurious relationship on panel regressions and to increase credibility on regression coefficients, we use clustered robust standard errors model proposed by Petersen (2009) as robustness to check it. After adjustment, empirical results stay close to the original before adjustments, and improve the explanatory power of dependent variables.
Overall, our results reveal that higher country-level governance can decrease sensitivity between agency problem and corporate cash holdings. Therefore, firms should establish good corporate governance structure to reduce agency problem and financial constraints, so they can have better growth opportunities to enhance their corporate values.
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