27The Determinants of Corporate Cash Management Po

TheDeterminantsofCorporateCashManagementPolicies:EvidencefromaroundtheWorld*YuantoKusnadia,*,K.C.JohnWeibaDepartmentofAccountancy,CityUniversityofHongKong,TatCheeAvenue,Kowloon,HongKongbDepartmentofFinance,HongKongUniversityofScienceandTechnology,ClearWaterBay,Kowloon,HongKongABSTRACTWeexaminethedeterminantsofcorporatecashmanagementpoliciesacrossabroadsampleofinternationalfirms.Wefindthatfirmsincountrieswithstronglegalprotectionofminorityinvestorsaremorelikelytodecreasetheircashholdingsinresponsetoanincreaseincashflowthanarefirmsincountrieswithweaklegalprotection.Inaddition,thisrelationshipismostpronouncedforfirmsthatarefinanciallyconstrainedandthosewithhighhedgingneeds.Theresultsarerobusttoalternativespecifications.Ingeneral,ourfindingsreinforcetheimportanceofcountry-levelinstitutionalfactorsinmitigatingtheeffectsoffirm-levelfinancialconstraintsandhedgingneedsoncorporatecashmanagementpolicies.__________________________________*WethankKevinChen,ManapolEkkayokkaya,JieGan,NingGao,NengjiuJu,ShawnMobbs,LewisTam,HongpingTan,GarryTwite,XuepingWu,andseminarparticipantsattheChulalongkornUniversity,HongKongUniversityofScienceandTechnology,HongKongBaptistUniversity,UniversityofMacau,ShanghaiUniversityofFinanceandEconomics,the2008NTU-IEFAConference(Taipei),the2008NTUInternationalConferenceonFinance(Taipei),the2008AsianFinanceAssociation/NipponFinanceAssociationInternationalConference(Yokohama),the2008EuropeanFinanceAssociationAnnualMeeting(Athens),the2008FinancialManagementAssociationAnnualMeeting(Dallas)forhelpfulcommentsanddiscussions.ThepaperalsowinstheBestPaperAwardsatthe4thChinaFinanceAssociationAnnualMeeting(Changsha)andthe15thSFMConference(Kaohsiung).TheauthorsthankDr.VirginiaUnkeferforeditorialassistance.Allremainingerrorsareours.WeacknowledgethefinancialsupportfromCityUniversityofHongKongStart-UpGrant(ProjectNo:7200104).Allremainingerrorsareours.*Correspondingauthor.Tel:[phone];fax:[phone]E-mailaddresses:[e-mail](Y.Kusnadi),[e-mail](K.C.JohnWei)1.IntroductionThestreamofresearchoncorporatecashmanagementpolicieshasreceivedincreasingattentioninrecentyears.EarlystudiesbyKeynes(1936),JensenandMeckling(1976),Myers(1984),Jensen(1986),andMyersandMajluf(1986)havedebatedonthepotentialcostsandbenefitsofholdingcash.RelatedstudiesbyKimetal.(1998)andOpleretal.(1999)haveexaminedtheeffectsofvariousfinancialvariablesonthelevelofcashreservesforU.S.firms.Morerecently,anumberofpapershavedocumentedevidencethatcorporategovernanceatbothcountryandfirmlevelscouldpotentiallyinfluencecorporatecashholdingsinbothU.S.andinternationalfirms.1However,theconclusionsfromthisstrandofresearcharerelativelymixed.2Almeidaetal.(2004)arguethatexaminingchangesincashholdingsisperhapsamoreviablemeanstodetermineafirm’sdemandforliquidityfromatheoreticalperspective.Theimperfectionincapitalmarketsgivesrisetoadeviationbetweenthecostsofinternalandexternalfinancing.Firmsanticipatingahighercostofexternalfinancingaretherebyconstrainedintheirinvestmentsandfinancialpolicies.AsurveybyGrahamandHarvey(2001)revealsthattopmanagersvaluefinancialflexibilitywhenmakingimportantcorporatedecisions.Onewayforconstrainedfirmstoachievethisflexibilityistoaltertheircurrentfinancialpoliciestomeetfutureinvestmentneeds.Tobemorespecific,Almediaetal.(2004)proposethatcorporatedemandforliquiditycanbeempiricallytestedbymeasuringthemarginalpropensitytosavecash1SeeDittmaretal.(2003),Pinkowitzetal.(2006),DittmarandMahrt-Smith(2007),Harfordetal.(2007),andKalchevaandLins(2007)forasampleofrecentrepresentativeworkontherelationshipbetweencorporategovernancemechanismsandcashholdings.2WhileDittmaretal.(2003)documentasignificantlynegativerelationshipbetweencountry-levellegalprotectionandcashholdingsintheirsampleofinternationalfirms,Harfordetal.(2006)findanoppositerelationshipbetweenfirm-levelshareholderrightsandcashholdingsintheirU.S.sample.Combiningbothfirm-levelandcountry-levelmeasuresofcorporategovernance,KalchevaandLins(2007)confirmtheevidenceofanegativerelationshipbetweenfirm-levelgovernancemechanisms(thedegreeofmanagerialcontrol)andcashholdingsinaninternationalsetting.Moreover,thenegativeeffectoffirm-levelcorporategovernanceoncashholdingsismorepronouncedforfirmsincountrieswithweaklegalprotectionofinvestors.1outofcurrentcashflowsinordertofundmoreprofitablefutureinvestments,i.e.,thecashflowsensitivityofcash.Almeidaetal.(2004)furtherarguethatthecashflowsensitivityofcashisbetteratcapturingtheroleoffinancialconstraintsthanistheinvestment-cashflowsensitivity,ameasurethathasgeneratednumerouscriticismsintheempiricalcorporatefinanceliterature.3Theydevelopamodelwhichpredictsthatthecashflowsensitivityofcashshouldbepositiveandsignificantonlyforfinanciallyconstrainedfirms.Theirempiricalresultsstronglysupporttheirprediction,whichatteststotheimportanceofcashmanagementforfinanciallyconstrainedfirmsasopposedtounconstrainedfirms.Theobjectiveofthisstudyistoexaminetheroleoflegalprotectiononthecashmanagementpoliciesofinternationalfirmsaroundtheworld.Weusethreemeasuresofcountry-levell