Corporate Liquidity

Dittmar, Amy K.; Mahrt-Smith, Jan; Servaes, Henri

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Corporate Liquidity

49 Pages Posted: 11 Oct 2002

See all articles by Amy K. Dittmar

Amy K. Dittmar

University of Michigan at Ann Arbor - The Stephen M. Ross School of Business

Jan Mahrt-Smith

University of Toronto - Rotman School of Management

Henri Servaes

London Business School; Centre for Economic Policy Research (CEPR)

There are 2 versions of this paper

Date Written: August 2002

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.

Keywords: Corporate liquidity, cash holdings, shareholder rights

JEL Classification: G31, G32, G34

Suggested Citation: Suggested Citation

Dittmar, Amy and Mahrt-Smith, Jan and Servaes, Henri, Corporate Liquidity (August 2002). Available at SSRN: https://ssrn.com/abstract=333421