How creditor rights affect the value of cash: A cross-country study |
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| Institution: | 1. Center for Advanced Financial Research and Learning, RBI Main Building, Shahid Bhagat Singh Road, Fort, Mumbai 400001, India;2. Department of Finance, NUS Business School, National University of Singapore, 15 Kent Ridge Drive, 117592, Singapore;3. Finance & Accounting Area, Indian Institute of Management Bangalore, Bannerghatta Road, Bangalore 560076, India;1. University of International Business and Economics, China;2. Beijing Foreign Studies University, China;3. Cardiff University, UK;4. Faculty of Business and Economics, University of Hong Kong, Hong Kong;1. Smith School of Business, Queen''s University, Goodes Hall, K7L 3N6 Kingston, Ontario, Canada;2. Smith School of Business, Queen''s University, Kingston, Ontario, Canada |
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| Abstract: | We examine how legal protection of creditors affects the value of cash across countries. We find that the marginal value of cash is considerably higher in countries with weak creditor rights. Creditor rights are at least as relevant as shareholder rights, which other studies have found to be an important factor affecting various corporate policies. In addition, we find that marginal investment is more valuable for firms in countries with weak creditor rights. This combines the findings of previous studies that weak creditor protection makes firms financially constrained and that cash is more valuable for financially constrained firms. Subsample analysis suggests that financial constraints generated by weak creditor rights create underinvestment among cash starved firms but alleviate agency conflicts among cash rich firms. Further analysis reveals that good country governance complements laws protecting creditors in cash valuation. |
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