Do Firms in Countries with Poor Protection of Investor Rights Hold More Cash?

Dice Center Working Paper No. 2003-29

45 Pages Posted: 8 Dec 2003

See all articles by Lee Pinkowitz

Lee Pinkowitz

Georgetown University - Department of Finance

Rohan Williamson

Georgetown University - McDonough School of Business

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2003

Abstract

Managers make different decisions in countries with poor protection of investor rights and poor financial development. One possible explanation is that shareholder-wealth maximizing managers face different tradeoffs in such countries (the tradeoff theory). Alternatively, firms in such countries are less likely to be managed for the benefit of shareholders because the poor protection of investor rights makes it easier for management and controlling shareholders to appropriate corporate resources for their own benefit (the agency costs theory). Holdings of liquid assets by firms across countries are consistent with Keynes' transaction and precautionary demand for money theories. Firms in countries with greater GDP per capita hold more cash as predicted. Controlling for economic development, firms in countries with more risk and with poor protection of investor rights hold more cash. The tradeoff theory and the agency costs theory can both explain holdings of liquid assets across countries. However, the fact that a dollar of cash is worth less than $0.65 to the minority shareholders of firms in such countries but worth approximately $1 in countries with good protection of investor rights and high financial development is only consistent with the agency costs theory.

JEL Classification: G15, G31, G32

Suggested Citation

Pinkowitz, Lee Foster and Williamson, Rohan G. and Stulz, Rene M., Do Firms in Countries with Poor Protection of Investor Rights Hold More Cash? (November 2003). Dice Center Working Paper No. 2003-29. Available at SSRN: https://ssrn.com/abstract=476442 or http://dx.doi.org/10.2139/ssrn.476442

Lee Foster Pinkowitz (Contact Author)

Georgetown University - Department of Finance ( email )

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Rohan G. Williamson

Georgetown University - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
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202-687-4031 (Fax)

Rene M. Stulz

Ohio State University (OSU) - Department of Finance ( email )

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Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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European Corporate Governance Institute (ECGI)

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Belgium

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