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RFS Advance Access originally published online on May 16, 2007
Review of Financial Studies 2007 20(4):1087-1112; doi:10.1093/rfs/hhm023
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Right arrow G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
Right arrow G34 - Mergers; Acquisitions; Restructuring; Corporate Governance
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Copyright © The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies.

International Evidence on Cash Holdings and Expected Managerial Agency Problems

Ivalina Kalcheva
David Eccles School of Business, University of Utah and Eller College of Management, University of Arizona

Karl V. Lins
David Eccles School of Business, University of Utah

Address correspondence to Karl V. Lins, David Eccles School of Business, University of Utah., or e-mail: finkvl{at}business.utah.edu

JEL: G32, G34, G35


  Abstract

This article uses managerial control rights data for over 5000 firms from 31 countries to examine the net costs and benefits of cash holdings. We find that when external country-level shareholder protection is weak, firm values are lower when controlling managers hold more cash. Further, when external shareholder protection is weak we find that firm values are higher when controlling managers pay dividends. Only when external shareholder protection is strong do we find that cash held by controlling managers is unrelated to firm value, consistent with generally prevailing U.S. and international evidence.

We thank Hank Bessembinder, Daniel Chi, Jarrad Harford, Mike Lemmon, Ross Levine, William Maxwell, Robert McDonald, Adair Morse, Lee Pinkowitz, Henri Servaes, Frank Warnock, Rohan Williamson, and seminar participants at the Fourth Doctoral Internationalization Consortium at UCLA, Brigham Young University, the Federal Reserve Board of D.C., Georgetown University, Louisiana State University, the University of Minnesota, and the University of Utah for helpful comments. We thank Stijn Claessens, Mara Faccio, and Larry Lang for providing public access to ownership and control structure data for Japan and Western Europe and thank Amy Dittmar and Jan Mahrt-Smith for providing the private credit measures used in their international cash holdings study.


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