The determinants of corporate cash management policies: Evidence from around the world |
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| Authors: | Yuanto Kusnadi KC John Wei |
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| Institution: | 1. Department of Accountancy, City University of Hong Kong, Tat Chee Avenue, Kowloon, Hong Kong;2. Department of Finance, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong;1. Dongling School of Economics and Management, University of Science and Technology Beijing, China;2. Alliance Manchester Business School, University of Manchester, United Kingdom;3. School of Economics, Finance and Management, University of Bristol, United Kingdom;1. School of Economics and Management, Hebei University of Technology, Tianjin, China;2. Management Department, American University, Washington, D.C, USA;3. College of Business Administration, University of Missouri-St. Louis, One University Blvd, St. Louis, MO, 63121, USA;4. School of Business and Economics, Kunming University of Science and Technology, Kunming, China |
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| Abstract: | We examine the determinants of corporate cash management policies across a broad sample of international firms. We document that firms in countries with strong legal protection of minority investors are more likely to decrease their cash holdings in response to an increase in cash flow than are firms in countries with weak legal protection. This relationship is most pronounced for firms that are financially constrained and those with high hedging needs. More importantly, we do not find evidence that financial development plays an incremental impact on the cash flow sensitivity of cash, after controlling for the effect of legal protection. Therefore, we argue that the legal protection of investors (rather than financial development) represents the first-order effect in influencing international firms' cash management policies. The results are robust to alternative specifications. In general, our findings reinforce the importance of country-level legal protection of investors in mitigating the effects of firm-level financial constraints and hedging needs on corporate cash management policies. |
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