Corruption and Cash Holdings Evidence From Emerging Market

Accepted Manuscript
Corruption and cash holdings: Evidence from emerging market

economies
Bhanu Pratap Singh Thakur, M. Kannadhasan
PII: S1566-0141(18)30288-7
DOI: https://doi.org/10.1016/j.ememar.2018.11.008
Reference: EMEMAR 584
To appear in: Emerging Markets Review
Received date: 31 July 2018
Revised date: 5 October 2018
Accepted date: 26 November 2018
Please cite this article as: Bhanu Pratap Singh Thakur, M. Kannadhasan , Corruption
and cash holdings: Evidence from emerging market economies. Ememar (2018),
https://doi.org/10.1016/j.ememar.2018.11.008
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Corruption and Cash Holdings: Evidence from Emerging Market Economies
Bhanu Pratap Singh Thakur* , M Kannadhasan

Assistant Professor
School of Business Management
NMIMS, Navi Mumbai
Email id: thakurbhanu86@gmail.com
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M Kannadhasan
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Associate Professor
Indian Institute of Management Raipur
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Email id: mkdhasan@iimraipur.ac.in
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*
Corresponding Author
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Abstract
We examine the effect of corruption on cash holdings and cash value using a panel data set of 4236 firms
fro m 16 emerging market economies. We find that the cash holdings are positively related to the corruption
and by managing their cash holdings upwards, the firms can benefit in the corrupt environment by trading
cash. Furthermore, cash holding adds value to the firms. However, it is insignificant when the firms are
operating in high corruption environment with low investor protection. Overall, the eviden ce suggests that
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corruption play an important role in shaping the cash policies of firms in emerging markets.
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Keywords: Corruption, Cash holdings, Emerging markets, Value of cash .
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JEL Classification: G30, G32, G35, G38.
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1. Introduction
With globalization and more integrated world, corruption has become a central issue in the real world and
academic studies. Corruption, as rent seeking, is pervasive and how firms respond toward corruption has
important imp licat ions. Various empirical studies have analyzed the impact of corruption on varied range
of macro issues including foreign direct investment, health care and educational services (Tiongson et al.,
2000; Wei, 2001). There is also emp irical ev idence lin king lo w GDP gro wth with high level of corruption
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(Mauro, 1995; Murphy, Shleifer, & Vishny, 1991). However, at micro level, the emp irical literature linking
corruption and firm level financial policies is limited (Asiedu & Freeman, 2009; Lee & David, 2009;
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Svensson, 2003; Wei, 2001).
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Previous studies have suggested firm’s financial po licies as a possible channel through which fi rms avoid
rent seeking. In addition, studies have suggested that through convoluted regulations and targeted taxation,
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officials have the ability to extort firms (McChesney, 1987). In these circu mstances, firms can respond by
protecting the firm’s assets by getting expropriated. Empirical evidence suggests the use of more opaque
disclosure policies by firms when exposed to a greater corrupt environ ment (Du rnev & Fauver, 2007; Stulz,
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2005). A lternatively, firms can take the advantage of a corrupt environment by using political favors by
trading cash. Various empirical studies have shown that some firms do take advantage of corrupt
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environment, for example, by getting preferential treat ment or favorable credit terms (Claessens, Feijen, &
Laeven, 2008; Fisman, 2001; Tahoun, 2014). Th is can provide mot ivation for firms to improve their cash
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holdings in order to get benefit fro m the corrupting opportunities. In this study, we test two competing
research questions with respect to firm’s cash holding policies. One favors less liquidity and flexibility with
regards to cash holdings to shield the firm’s assets from appropriat ion and other favors more liquid ity and
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flexib ility in order to get benefit fro m the corrupt environ ment. In addition, we also examine the effect of
corruption on cash value.
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The empirical literature on cash holdings has traditionally fo cused on firm specific factors. In one of the
seminal studies, Opler et al., (1999) showed the importance of transaction motive for holding cash and the
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cost that arises due to holding excess cash. The studies have also shown that the firms with poor
governance structure tend to have a preference towards cash to avoid scrutiny from th e market (Yun, 2008).
Besides, the firms having mult iple investment requirements tend to maintain higher level of cash reserves
(Kim et al., 1998). In addition, various empirical studies have also focused on the institutional factors like
security laws (Chen, 2011), anti-takeover provisions (Ditt mar & Mahr-Smith, 2007), unionization and
competition in the industry to explain the variations in cash holdings (Haushalter, Klasa, & Maxwell,
2007), economic policy uncertainty (Demir & Ersan, 2017), country level governance (Seifert & Gonenc,
2018) and market orientation of the economy (Hall, Mateus, & Mateus, 2014).
Overall, the empirical literature has examined various firm specific factors and institutional factors in
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determining the firm’s cash holdings. However, inclusion of corruption as an important institutional factor
is limited in the literature. Further, the studies which focuses on corruption as a driving force are, either the
single country studies (Fisman, 2001; Smith, 2016) or less focused on the emerging market economies
(Chen, 2011). In addit ion, the political corruption is rife in emerg ing markets and businesses have to deal
with govern ment intervention constantly (La Porta et. al., 1999; Sh leifer & Vishny, 1994). Hence, this
study focuses on corruption, defined as the abuse of entrusted power for private gain by Transparency
International, and its impact on cash holdings and cash value in firms operating in emerg ing market
economies.
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We find a consistent positive relat ionship between corruption and cash holdings in emerging market
economies. Ou r results further indicate that the firms in emerging market econo mies favor mo re liquid
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financial policy with regards to cash holdings. By managing the cash holdings upwards, firms can benefit
fro m the corrupt environment by trading cash. In addition, we also find that the cash holdings add value to
the firm. However, this relationship is contingent on institutional factors like corruption and investor
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protection. The value effect of cash in not significant when the firms are operating in an environment of
high corruption with low investor protection. The results are also robust to the various sub-sample analyses
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and also to the alternate measure of corruption. Overall, our study contributes to the existing literature of
corporate liqu idity and shows the importance of corruption in determining cash holdings in firms operating
in emerging market econo mies . In addition, the firms should consider corruption when maintain ing optimal
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cash holdings. Excess cash can be value reducing in a corrupt environment with low investor protection.
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The rest of the paper is structured as follows. Section 2 provides the literature rev iew and develops the
hypothesis regarding cash holdings and corruption. Section 3 describes the data and methodology used in
this study. Sections 4 discuss the empirical results while Section 5 concludes.
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2. Literature Review and Hypothesis Development

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2.1. Cash Holdings

Generally, the firms maintain an optimal positive cash reserve and in a frictionless economy, there are no
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negative imp licat ions of holding positive cash reserves. However, in the real world, market is full of
various kinds of costs, and hence having a reserve of cash holdings matter. Literature on the cash holdings
suggests different reasons for firms to hold cash and includes transaction motive, agency motive,
precautionary motive, tax motive and predation motive.
The transaction motive for cash holding assumes that there is a substantial cost of conversion of non-cash
assets in to cash assets when the firm is in requirement of cash. And hence, firms maintain an optimal
reserve of cash holdings in order to carry out the normal operations of the business without any cash
shortage. However, in order to exist an optimal level of cash holdings, there should exist a cost to hold
excess of cash. The cost, which arises due to holding excess amount of cash, is called as the liqu idity
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premiu m (Op ler et al., 1999). Early empirical literature suggests the use of inventory management models
by the firms to manage and maintain optimal cash reserve (Baumo l, 1952; Miller & Orr, 1966). Essentially,
the firms fo llo w a ’saw-tooth’ model and convert a fixed amount of asset in to cash in every period an d
runs it down to zero before converting another chunk of asset in to cash. This way the firm balances the
cost of cash shortage and the cost of interest inco me forgone. The important empirical implications are that
the economies of scale will co me in to picture for large firms and subsequently large firms will hold less
cash. Additionally, the firms will hold mo re cash in a period of large cash outflow resulting fro m activ ities
like investments.
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The agency motive suggests that the managers of the firms holds large amount of cash to invest in the
projects that may or may not impact the valuation of the firm. By using the internal cash as a source of
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financing, the managers of the firms avoid the scrutiny fro m the lenders as in case of the financing fro m the
capital markets. Emp irical literature suggests that the large amount of cash holdings lead to ine fficient
mergers and acquisitions and limit ing the access to large amount of cash holdings lead to increase in firm
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value (Jensen, 1986). Studies have also shown that the firms with poor governance structure tend to have a
preference towards cash rather than financing through capital markets (Harford, Li, & Zhao, 2008). The
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study shows that firms with poor governance structure holds less cash reserve because of the tendency of
the managers to spend cash quickly on acquisitions and investments. Additionally, Yun, (2008) found that
the firms with poor governance prefer non-monitored cash instead of bank cred it to avoid scrutiny fro m the
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market.
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In one of the important emp irical study, Gao, Harford, & Li (2013) examine and co mpare the cash holdings
in public and private firms. The study showed that after controlling for the important co mmon factors, the
tendency of the private firms is to hold less cash than the public firms. The argu ment underlying the result
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is that the public firms are more prone to agency problems as compared to private firms because of the
greater financing constraints faced by the private firms. Fu rther, Dittmar & Mahr-Smith (2007) analy zed
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the impact of anti-takeover provisions to the value of cash holdings. The study showed that the cash
holdings of the poorly governed firms are valued less by the market because of the possibility of the
managers to spend it in value decreasing projects.
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The precautionary motive for hold ing cash reserves argues the requirement of cash reserves in times of
uncertainty caused by financing frict ions. The precautionary motive is similar to the transaction motive but
it focuses on the adverse shocks that the firms may face in the future. Emp irical studies have shown that the
firms having multip le investment requirements and higher variable cash flow tend to maintain higher level
of cash reserve (Kim et al., 1998; Opler et al., 1999). Additionally, the firms facing less financing
constraints tend to manage their cash balance downwards significantly. In a similar study, Almeida,
Campello, & Weisbach (2004) examined the relat ionship between firm’s financial constraints and
requirement for liquid ity. The study found that the firms with higher financial constraints tend to have
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higher cash flow sensitivity and showed the importance of market frictions and role it p lays in managing
cash reserves. Further, in a study Lins, Servaes, & Tufano (2010) surveys both private firms and public
firms in a mult i country setting to understand their risk management practices. Th e study shows that the
firms use cash primarily instead of lines of credit to protect themselves against possible future cash crunch.
Additionally, Bates, Kahle, & Stulz (2009) examined the general rise in cash holdings in US firms. The
study found that the firms having characteristics of high R&D intensity and having riskier cash flows tend
to have higher cash balance.
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The other important motive for hold ing cash is tax motive. Many countries like US tax the foreign income
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when the firm repatriates the income giving the firms strong incentives to hold large amount of cash
reserves. For example, Foley et al., (2007) shows that the firms that face mo re repatriat ion constraints tend
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to have large cash holdings. Further, the subsidiaries facing large repatriat ion tax maintain a large cash
balance as compared to the similar subsidiaries facing less tax.
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According to the predation motive for holding cash, the firm having similar investment opportunities as
their rivals tends to have large cash holdings. This is because the cost of not investing in a project tends to
be much greater if the rival firm takes the first mover advantage. Empirical literature has shown that the
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investments from the firms are more p rone to overlap in industries having oligopolistic nature (Kovenock
& Ph illips, 1997). Haushalter et al., (2007) tested the predation motive theory using the concentration in an
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industry as a proxy of predation by the rival. The study found that the firms operating in a concentrated
industry tend to have large cash reserves. Further, the effect is even more significant in industries with
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more investment opportunities. Similarly, Hoberg, Ph illips, & Prabhala (2014) found that the firms facing
more competitive threats tend to have more cash reserves.
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Studies have shown that over the past many years, the overall cash reserves of the firms have been
increasing (Gao et al., 2013). W ith the same pace, the academic literature on corporate cash holding has
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also grown. In this study, we further explore the precautionary motive of holding cash flow and explore the
role of corruption as an important market friction.
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2.2. Corruption and Cash Holdings

It is clear fro m the literature that the corruption does occur and carry large costs to the economic
environment. But, how does the firms in a corrupt environ ment manage to evade these costs? Prior
literature suggests that altering firm’s financial po licies might act as a possible channel through which firms
avoid rent seeking. Previous emp irical studies have examined and suggested that through convoluted
regulations and targeted taxation, the officials have the ability to extort firms (McChesney, 1987). In these
circu mstances, the firms can respond by protecting the firm’s assets by getting expropriated. Emp irical
evidence suggests the use of more opaque disclosure policies by firms when exposed in a greater corrupt
environment (Stulz, 2005). The idea of shielding assets fro m the outside party fits easily in the literature of
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corruption. In an important empirical study dealing with the corruption, Svensson (2003) notes that: ”The
more a firm can pay... the more it must pay.”
In an empirical study, Klasa et. al., (2009) found that the firms tend to reduce their cash reserves when
operating in more unionized industries in order to have advantage during the bargaining process with the
unions. Speaking differently, the firms avoid extraction of cash by outside party by sending the signal of
having less liquidity. The idea of integrating the effect of corruption on management of liquidity is dealt by
Caprio et. al., (2013). The study found that the firms operating in a more corrupt environment have less
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cash reserve and tend to issue more dividends. The emp irical literature has also suggested the ease of
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conversion of liquid asset for private consumption (Myers & Rajan, 1998). In addition the literature also
indicates that the firms tend to restructure their assets in order to avoid expropriation fro m the external
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agents (Stulz, 2005). These argument supports the conjecture that firms adopt financial policies that favors
less liquid ity and inflexib ility with regards to cash holdings in order to avoid expropriation o f its assets.
Hence we test following hypothesis in this study.
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H1: Firms operating in an economy with greater level of perceived corruption tend to have lower cash
holdings.
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Alternatively, firms can take the advantage of a corrupt environ ment by using political favors by trading
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cash. Various emp irical studies have shown that some firms do take advantage through corruption. For
example, Fis man (2001) examined the value of polit ical connectedness in Indonesian firms. The study
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found the dependence of some of the firms on polit ical connectedness and it was a d irect factor in
determining firm value. In fact, the polit ical connectedness was found to be the primary factor in
determining profitability, instead of some fundamental factor such as productivity. Faccio, Masulis, &
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McConnell (2006) examined the probability of receiving government bailouts in politically connected firms
in a mult i country analysis. The study found that the firms that were politically connected tend to be bailed
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out as compared to the firms that were not connected. In addition, the probability of receiving ba ilout
package was more in politically connected firms when the home government receives financial assistance
fro m various international agencies like World Bank and International Monetary Fund. Overall, the study
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shows that the political connected firms get preferential access to the financing in the t imes of econo mic
distress.
Claessens et al. (2008) examines the effect of political financing by the Brazilian firms on their ab ility to
receive political favors in future. The study found the strong evidence of association between the campaign
financing by the firms with high stock valuation during the times of election results. The study also found
the evidence of preferential access to financing as a political favor. Overall, the results indicate the
importance of bank finance as a channel to receive political favors. Go ld man, Rocholl, & So (2008)
examines the effect of politically connected boards on the firm valuation in US. The study explores the
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value of political connectedness by analyzing the event of presidential election with the boards having
nominated the politically connected director. The result shows a significantly positive stock returns
associated with the politically connected director’s nomination. Additionally, the e ffect was stronger for
large companies in the sample.
Further, in a study, Duchin & Sosyura (2012) examine the association between the investment by the
governments and political connectedness of corporates. The study analyses various types of polit ical
connectedness like campaign financing, lobbying and employ ment of the politically connected directors.
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The results showed that the firms that were mo re connected received more political favors in terms of
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funding requirements. Ho wever, the performance of the investment in the connected firms was much lower
than the unconnected firms. Fro m the above discussion, this can be inferred that the corrupt environment
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can provide motivation for the firms to imp rove cash holdings and hence firms follow liquid financial
policies with regards to cash holdings. Hence, we test the following hypothesis in this study.
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H2: Firms operating in an economy with greater level of perceived corruption tend to have higher cash
holdings.
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2.3. Corruption and Cash Value
The literature on corporate liqu idity suggests that the cash add value to the firms by generating financial
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flexib ility and reducing transaction cost. Though, the empirical literature suggests a positive relations hip
between corporate liqu idity and firm value, the relat ionship is also contingent on various firm specific
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factors and institutional environment (Ditt mar, Mahr-Smith, & Servaes, 2003; Pinko wit z, Stulz, &
Williamson, 2006). The institutional environment moderates the relationship between cash holdings and
firms value through different channels: access to financing through capital markets, the cost of debt, GDP
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growth rate and the overall financial market development (Ditt mar & Mahr-Smith, 2007; Faulkender &
Wang, 2006; Fresard, 2010; Garcia-Teruel & Martinez-Solano, 2008; Lins et al., 2010).
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The ability of the cash to add value to the firm gets reduced in the presence of various institutional factors
like investor protection. Various emp irical studies have shown the negative effect of poor investor
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protection on the value creating effect of cash (Kalcheva & Lins, 2007; Pinko wit z et al., 2006). In addit ion,
this relationship could also be moderated by corruption in an economy (N. Chen, 2011) because of
increased agency problem with management working for their own benefits (Pin kowitz et al., 2006). In
contrast, in countries with low level of perceived corruption, the problem of agency tends to be less severe.
The overall objective of the management and shareholders should not digress too much. The management
acts to maximize the firm value by taking financial decisions that are beneficial to the firms. And,
maintaining healthy cash reserve is aimed only to maximize the firm value instead for managerial
expropriat ion. Hence, in the countries with low level of perceived corruption, the cash holdings should be
value enhancing for firms. Based on the above discussion, we test the following hypothesis with respect to
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corruption and cash value.
H3: There is reduction in the value of cash in economic context with greater level of perceived corruption.
3. Data and Methodology

3.1. Sample
The sample co mprises of 4236 firms with 38763 firm year observations fro m16 emerging market
economies and the data ranges from year 2002 to 2015. To clean the data and make the final sample ready
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for the main analysis, lot of filtering criteria were used. First, the firms were dropped fro m the sample if the
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data for the desired variable was not available. Second, only those firms were selected which were having
at least 5 years of consecutive data for all the desired variab les. This makes estimation of results more
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robust (Petersen, 2009). Third, the firms belonging to financial and utilit ies categories (GICS category 40
and 55) were discarded because these firms are regulated and hence their financial policies might reflect
these differences (Smith, 2016). In addition, the data is also winsorized at 5% and 95% level to negate the
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effect of outliers (Demir & Ersan, 2017). Finally, only those countries were selected in the final sample
which were having at least 50 firms meeting the criteria to have an appropriate level o f representation from
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a given country (Fan et al., 2012). Table 1 provides the description of the sample.
3.2. Variables
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Appendix A provides the definit ion of all the variables and the data sources used in this study. All the firm
level data are downloaded fro m Bloomberg. The data for country level variables are downloaded fro m
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World Bank database, International Financial Statistic (IM F) database and Transparency International
database. The legal origin data for the countries is taken from Treisman (2000).
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3.2.1. Cash Holdings and Firm Value

To examine the effect of corruption on cash holding we use cash holdings as the ratio of the cash & cash
equivalents to total assets (Boubakri, El Ghoul, & Saffar, 2013; Ozkan & Ozkan, 2004). To examine the
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effect of corruption on cash value, we use market -to-book (M B) rat io to pro xy for firm value (Ararat,
Black, & Yurtoglu, 2017; Black, De Carvalho, & Gorga, 2012).
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3.2.2. Corruption
We use Transparency International’s Corruption Perception Index (CPI) as our main pro xy for the
corruption as it provides maximu m time series and cross sectional variation. The CPI reflects the
perception of corruption among the public officials and politicians. Till the year 2012, the Transparency
International provided the CPI data that ranges fro m 0 to 10 with lower value indicating h igher corruption.
Fro m the year 2013, the scaling has been changed and now the CPI data ranges from 0 to 100. For
consistency, we rescaled the CPI and reversed the index and it ranges fro m 0 to 100 for the entire period of
the study and higher value indicates higher corruption. In the robustness section, we also use the World
Bank’s Control of Co rruption (CC) index as a p ro xy for the corruption (Kau fmann, Kraay, & Mastruzzi,
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2006). The original CC index ranges fro m -2.5 to 2.5 with the lower values indicating higher corruption.
Again, we rescaled the CC index and reversed it and it ranges fro m 0 to 10 with the higher values
indicating the higher corruption. Various emp irical studies have used these proxies to measure corruption
(Chen, Jeon, Wang, & Wu, 2015; Fan et al., 2012; Lee & David, 2009).
Table 1: Sample
S.No Country No. of Firms Firm Years

1 Brazil 107 686
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2 Chile 74 751
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3 China 606 5648
4 Egypt 77 643
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5 Greece 239 2010
6 India 846 6873
7 Indonesia 230 2237
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8 Malaysia 627 6639
9 Mexico 66 624
10 Pakistan 67 484
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11 Philippines 89 907
12 Poland 228 1851
13 South Africa 150 1491
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14 South Korea 350 3250

15 Thailand 348 3616
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16 Turkey 132 1053

Total 4236 38763
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3.2.3. Firm Specific Control Variables

To examine the relat ionship between cash holdings and corruption, we derive the firm level control
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variable fro m the existing literature on cash holding determinants (Bates, Kah le, & Stulz, 2009; Beuselinck
& Du, 2017; Boubakri et al., 2013; Ghaly, Anh Dang, & Stathopoulos, 2017; Haushalter et al., 2007). The
control variable includes market to book rat io, leverage, cap ital e xpenditure, size and cash flo w. To
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examine the relationship between corruption and cash value, we include extensive list of covariates that are
coherent with the existing literature (Ararat et al., 2017; Black et al., 2012; Fan et al., 2012; Smith, 2016).
We use cash holdings to examine its relat ionship with firm value in the presence of corruption . We also use
firm size as log of assets in order to control its effect on firm value. To control fo r pro fitability, we use
return on assets as the ratio of net income to total assets. We also control for cap ital intensity using the ratio
of capital expenditure to total assets and asset tangibility by using ratio of propert y plant & equip ment to
total assets. We also use leverage because it can affect firm value in many ways. Leverage provides tax
advantage and also affects the bankruptcy risk.
3.2.4. Country Specific Control Variables

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In addition to the firm level control variab les, we also include country level control variables in order to
control for institutional differences among the countries that possibly affect the firms in their respective
countries. These variables are categorized as macroeconomic variables, the financial develop ment and
suppliers of capital variables and the public governance variables. We include two macroeconomic
variables in this study i.e. inflat ion and GDP growth rate. The inflat ion rate measure the level of
macroeconomic instability in the country and GDP growth rate is the measure of real economic growth in
the country. In the financial develop ment and suppliers of capital category, we include four country specific
variables. The supply of funds by the intermediaries like banks and insurance firms affect the financial
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decisions of the firms (Fan et al., 2012). Specifically, we have included two measures of supply of funds
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that are available to two main financial intermediaries i.e. banks and insurance firms. First, we have
included the ratio of country’s liquid liabilities (deposits) to GDP to pro xy for the supply of funds available
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to the banks. Second, to proxy for the funds available to the other financial intermediary i.e. insurance
firms, we have included insurance penetration. In addition, we have also included the ratio of gross
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domestic savings to GDP to pro xy overall quantity of funds at the disposal of financial intermediaries. In
addition, we have also added stock market turnover ratio as the pro xy for level of financial develop ment in
the country. These variables are consistent with the prio r literature (De Jong, Kabir, & Nguyen, 2008;
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Demirguc-Kunt & Maksimovic, 1999; Fan et al., 2012).
Under the public governance variables category, we include two country specific variables i.e. ru le of law
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(RL) index and regulatory effectiveness index provided by World Bank. The rule of law index pro xy for
the general public’s perception of the quality of the judicial system, contract enforcement, property rights
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and the police. The regulatory e ffectiveness index pro xies for the general perception of the ability of the
government to imp lement and legislate rules and regulations to imp rove overall business environment.
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Both the index originally ranges from -2.5 to 2.5. We rescaled and reversed both the indexes and they
ranges from 0 to 10 with higher value indicat ing weaker rule o f law and weaker regulato ry effectiveness. In
addition to the enforceability of the legal system (rule of law index), the content of law is equal ly
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important. Po rta et. al., (1998) found that common law based legal system offer better protection to outside
investors than legal system based on civil law which in turn result in better security valuations (Porta et. al.,
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2002). To control for this factor, we use dummy variab le, wh ich take a value of 1 if the legal system of the
country is founded on common law and 0 else (Treisman, 2000).
3.3. Methodology
One of the most co mmon forms of dependence in corporate finance application is described as the
unobserved firm effect (Wooldridge, 2002) and in the presence of firm e ffects, the standard errors obtained
by various procedures (e.g. OLS, Fama-MacBeth, Newey-West) tend to be b iased. However, it has been
found that the clustered standard errors tend to be unbiased and give the best results (Petersen, 2009). In
addition, the standard errors can be clustered on mult iple d imensions e.g. time and industry in addition to
clustering by firm. Ho wever, in corporate finance application, firm effect is much more pronounced and
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standard errors clustered by firm give unbiased estimates and the time effect is much more important in
asset pricing applications . In addition, the efficiency of the estimates can be further imp roved by using
techniques such as fixed effects estimat ion (Petersen, 2009). Hence, we obtain our results by estimating
following model by fixed effects estimation technique
Yit = β0 + βXit + γZt + eit
where Yit denotes the dependent variable wh ich include cash holdings and firm value in d ifferent
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specifications. The variable Xit denotes the vector of firm specific control variables and Zt denotes country
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level control variab les. We cluster the standard errors by firm and industry. In addition, the firm fixed
effects and the country fixed effects are included in all the specifications. All the independent variables are
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lagged 1 year to control for the potential endogeneity.
4. Empirical Results
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4.1. Descriptive Statistics
Appendix B describes the summary (mean) of all the variables country wise. Tab le 2 describes the
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summary statistics for the full sample and Appendix C shows the correlation matrix of the entire sample.
Table 2: Summary Statistics- Full Sample

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S.No. Variables N Min Max Mean SD

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1 CH 38763 -0.09 0.64 0.07 0.07

2 LEV 38763 -0.62 1.80 0.36 0.20
3 MB 38763 -1.06 5.13 0.54 0.80
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4 CAPX 38763 -0.44 0.03 -0.05 0.05

5 SIZE 38763 14.02 20.69 18.65 0.97
6 CF 38763 -0.44 0.64 0.07 0.07
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7 ATANG 38763 0.00 0.97 0.38 0.16

8 ROA 38763 -0.36 0.43 0.03 0.06
9 TI 38763 25.00 81.00 59.46 9.69
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10 CC 38763 1.82 7.29 5.27 0.94

11 LL 38763 22.81 147.84 85.73 29.82
12 GDS 38763 5.21 50.70 32.42 8.43
13 INS 38763 0.57 13.92 3.75 2.11
14 SMT 38763 5.23 430.23 71.67 49.80
15 LO 38763 0.00 1.00 0.49 0.50
16 RL 38763 2.13 6.94 4.80 1.04
17 RQ 38763 1.92 6.81 4.63 1.04
18 INFL 38763 -1.74 24.22 4.24 2.72
19 GDP 38763 -9.13 14.23 5.42 3.07
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Note: CH is cash holdings, LEV is market leverage, M B is market -to-book ratio, CAPX is capital
expenditure, SIZE is firm size, CF is cash flo w, ATANG is asset tangibility, ROA is return on assets, TI is
Transparency International’s Corruption Perception Index, CC is World Bank’s Control o f Corruption
Index, LL is country’s liquid liability to GDP ratio, GDS is gross domestic savings, INS is insurance
penetration, SMT is stock market turnover ratio, LO is legal origin, RL is Ru le of Law Index, RQ is
Regulatory Quality Index, INFL is inflation and GDP is GDP growth rate.
Fro m Appendix B, it can be seen that all the variables shows quite similarities in the overall mean. This
shows that the sample countries are quite similar in their characteristics being the emerging market
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countries. For example, the leverage rat ios are generally h igher in all the countrie s. However, there are
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some notable exceptions. For examp le the CPI data shows that the general level of corruption is generally
high in all the countries except Ch ile, Po land and South Korea. In addition, the countries China and
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Malaysia fare higher in the liquid liab ility to GDP rat io. This shows the dominance of banking sector in the
overall financial sector in these two economies. In addition, China is als o very high in overall gross
domestic savings when compared to the other countries in the sample. With regards to the insurance
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penetration, South Africa and South Korea shows higher values when compared to the rest of the sample.
This highlights the importance of insurance industry in these two countries. The stock market turnover rat io
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also shows some exceptions. Specifically, China, Pakistan, South Korea and Turkey show higher values
when compared to the rest of the sample. In addition, countries like Eg ypt, India, Indonesia, Pakistan and
Turkey also shows higher level of inflation than rest of the sample countries.
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Table 2 shows the summary statistics for the entire sample. Overall, there is a substantial variation in the
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sample. A ll the dependent variables show wide variations and the entire sample is quite heterogeneous.
Appendix C shows the correlation matrix of the entire sample. Fro m the table it can be seen that the two-
corruption index (CPI & CC) are h ighly correlated with each other and hence we use them in different
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regression specifications. Also, the governance indicators (rule of law and regulatory e ffect iveness) are
highly correlated with each other and CC index so we do not use them in same regression specificat ion.
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Overall, the correlation between the firm specific and the country specific variables that we include
together in our regression specifications is quite low. Hence, multicollinearity is not an issue in this study.
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4.2. Results
4.2.1. Corruption and Cash Holdings
Table 3 d isplays the result of the panel data regression of cash holdings and corruption. The specificat ion 1
of table 3 includes only firm specific independent variables. The specification 2 add the corruption variable
i.e. Transparency International’s CPI. The specification 3 o f table 3 includes two macroeconomic variables
i.e. inflat ion (INFL) and GDP gro wth rate (GDP) and four other variables that co mes under the category of
financial development and suppliers of capital i.e. liquid liability to GDP rat io (LL), insurance penetration
(INS), gross domestic savings (GDS) and stock market turnover ratio (SMT). The specification 4 and 5 of
table 3 also includes regulatory effectiveness (RQ) index and rule of law (RL) index respectively.
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The specification 1 of table 3 shows the importance of firm specific variables in exp lain ing the variation in
cash holdings. These firm specific variables are d rawn fro m the exit ing literature on the determinants of
cash holdings (Bates et al., 2009; Haushalter et al., 2007; Op ler et al., 1999). These firm specific variables
shows expected signs and are consistent in all the specifications. The market -to-book rat io (M B), capital
expenditure (CAPX) and cash flo w (CF) shows positive sign and are significant at 1% level except CAPX,
however the variab le CAPX shows significance in other specificat ions. The MB rat io pro xy the investment
opportunities in an economy and a positive relat ionship suggests that the firms maintain higher cash
holding when investment opportunities are higher. Similarly, CA PX pro xy the growth opportunities and
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suggest that the firm hold mo re cash when operating in high gro wth environ ment. The positive relat ionship
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between CF and cash holdings suggest that the firms having higher level of cash flow hoard more cash
holdings. The variab les leverage (LEV) and size (SIZE) are negatively related to the cash holdings and are
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also significant at 1% level. The negative relationship between LEV and cash holdings suggests that both
are substitutes when financing decisions are considered. The negative relationship between SIZE and cash
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holdings suggests that the big firms have more capability of accessing capital markets for financing needs
and hence the requirement of maintaining higher cash holdings is less.
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However, the main variab le of interest in this study is corruption variable (TI). The variable TI is positively
related to the cash holding and is s ignificant in all the specificat ions (2 to 5) of table 3. Fro m this result this
can be inferred that the firms do manage healthy cash balance in order to get benefit fro m the corrupting
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opportunities. This result is in contrast to the Smith (2016) where cash holding is negatively related to the
corruption in US. Th is contrasting result can be attributed to various reasons. The corruption level in
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emerging market economies is generally high in co mpar ison to the US. In addition, there are various
institutional differences between US and emerging market economies. The financial market is highly
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developed in US when co mpared to emerg ing market economies. Additionally, the legal system is strong
and investor protection is high in US. Ho wever, our result shows the significance of corruption in shaping
the policies regarding cash holdings in countries where the corruption level is generally h igh. Overall, the
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result indicates that the firms in emerg ing market economies maintain their liquidity level to benefit fro m
the corrupting environment.
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The other country specific variables are also significant in all the specifications except GDS, which is not
significant. The governance indicators i.e. RQ and RL are a lso positively related to the cash holdings and
are significant. This positive relationship does indicate that in order to deal with the higher level of
uncertainty in the economy, firms do manage their cash holdings upwards and protect themselves. Further,
the weaker rule of law and regulatory effect iveness complement the corrupt environ ment and hence give
incentive to the firms to maintain high liquid ity in order to get benefit fro m corrupting environment. The
two-macro level control variables i.e. INFL and GDP are also significant at 1% level in all the specification
in which they are included. The variable inflation is negatively related to the cash holdings suggesting that
the firms operating in the economies with higher inflat ion level tend to maintain their cash holdings
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downward. This is in line with the economic argu ment that the higher inflation level tends to erode the
value of cash holdings. In contrast GDP is positively related to the cash holdings suggesting that firms
maintain a higher level of cash holdings in economies with higher GDP growth rate in order to take benefit
of the growth opportunities in the economies. This is also consistent with the other studies (Awartani et. al.,
2016).
Table 3: Panel Data Regression: Cash Holdings and Corruption
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The sample includes 4236 firms with 38763 firm year observations from 16 Emerg ing Market economies.
The dependent variable is cash holdings (CH). Country fixed effects and firm fixed effects are included.
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Standard errors are heteroscedasticity robust Rogers standard errors and are clustered by both firm and
industry. ***, ** and * denote significance at 0.01, 0.05 and 0.10 levels respectively. CH is cash holdings,
LEV is market leverage, M B is market-to-book ratio, CAPX is capital expenditure, SIZE is firm size, CF is
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cash flow, TI is Transparency International’s Corruption Pe rception Index, LL is country’s liquid liability
to GDP ratio, GDS is gross domestic savings, INS is insurance penetration, SMT is stock market turnover
ratio, RL is Rule of Law Index, RQ is Regulatory Quality Index, INFL is inflation and GDP is GDP g rowth
rate.
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Variables 1 2 3 4 5
*** *** *** *** ***
MB 0.004 (0.001) 0.003 (0.001) 0.003 (0.001) 0.003 (0.001) 0.004 (0.001)
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-0.060*** -0.063*** -0.062*** -0.063*** -0.061***
LEV (0.001) (0.006) (0.005) (0.005) (0.001)
CAPX 0.021 (0.019) 0.023 (0.019) 0.027* (0.015) 0.027* (0.015) 0.026* (0.014)
M
-0.005***
SIZE (0.002) -0.004** (0.002) -0.003** (0.002) -0.003* (0.002) -0.004** (0.001)
CF 0.065*** (0.013) 0.063*** (0.013) 0.071*** (0.014) 0.071*** (0.014) 0.073*** (0.014)
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TI 0.001*** (0.000) 0.001*** (0.000) 0.001*** (0.000) 0.001*** (0.000)

-0.001*** -0.001*** -0.001***
INFL (0.000) (0.000) (0.000)
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GDP 0.001*** (0.000) 0.002*** (0.000) 0.001*** (0.000)

-0.003*** -0.003*** -0.003***
INS (0.001) (0.001) (0.001)
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GDS -0.000 (0.000) -0.000 (0.000) -0.000 (0.000)

-0.000*** -0.000*** -0.000***
SMT (0.000) (0.000) (0.000)
0.001*** (0.000) 0.001*** (0.000) 0.001*** (0.000)
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LL
RQ 0.003* (0.002)
RL 0.014*** (0.001)
Observations 38763 38763 38763 38763 38763
Ad R
Squared 0.04 0.05 0.09 0.09 0.09
F- Statistics 221.3 198.3 26.6 57.45 34.31
The country level control variables under the category of financial development and supplier of capital are
also significant except GDS, wh ich is not significant. The variables insurance penetration (INS) and the
stock market turnover rat io (SMT) are negatively related to the cash holdings wh ile liquid liab ility to GDP
ratio (LL) is positively related to the cash holdings. This indicates the preference and importance of
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banking sector as the supplier o f capital in the economies with lower level o f investor protection (Fan et al.,
2012). Overall, even after controlling for country level variables and firm level variables, the corruption
variable show significance consistently in all the specifications and remain positively related to the cash
holdings.
For robustness, we have also performed a series of sub-sample analysis. We have divided the sample in to
four sub-samples. The first two sub-samples are based on legal orig in i.e. civil law (LO 0) and co mmon law
(LO 1). The other two sub-samples are based on geographical d istribution. One is based on Asian countries
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and other includes rest of the countries in the sample. The results are included in Appendix D to G. Overall;
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the result is consistent with regards to corruption variable (TI). The variab le TI is significant and positively
related to cash holdings in all the sub-samples except the sub-sample based on legal origin 1 (Appendix E).
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This is a striking difference when co mpared to the results of the other sub-sample (Appendix D) based on
legal origin. Legal origin does play an important role in moderating the a ffect of corruption and the
financial policies of firms regarding cash holdings does not seems to get influenced by the high level of
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corruption. This result is consistent with the previous study (Porta et al., 1998) that argues that the legal
system based on common law system does provide better investor protection when compared to the legal
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system based on civil law. In addition, we have also performed the robustness check by using alternate
measure of corruption i.e. World Ban k’s Control of Corruption index (CC) in Table 4. We have used 3
specifications and do not include the two governance indicators (RL and RQ) because of the high
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correlation with the corruption variable (CC).

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The corruption variable is significant and positively related to the cash holdings and is consistent with the
main result (Table 3). Overall, our results on the effect of corruption on cash holdings provide evidence that
the firms in emerg ing market economies favor mo re liquid financial policy with regards to cash holdings.
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By managing the cash holdings upwards, firms can take the advantage of corrupt environment by trading
cash. These results are also consistent with earlier literature that suggest that firm takes the advantage of
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corrupt environment by getting favors through various channels (Claessens et al., 2008; Duchin & Sosyura,
2012; Goldman et al., 2008; Tahoun, 2014).
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Table 4: Panel Data Regression: Cash Holdings and Corruption (World bank’s CC Index)
The dependent variable is cash holdings (CH). Country fixed effects and firm fixed effects are included.
Standard errors are heteroscedasticity robust Rogers standard errors and are clustered by both firm and
industry. ***, ** and * denote significance at 0.01, 0.05 and 0.10 levels respectively. CH is cash holdings,
LEV is market leverage, M B is market-to-book ratio, CAPX is capital expenditure, SIZE is firm size, CF is
cash flow, CC is World Ban k’s Control of Corruption Index, LL is country’s liquid liability to GDP ratio,
GDS is gross domestic savings, INS is insurance penetration, SMT is stock market turnover ratio, RL is
Rule of Law Index, RQ is Regulatory Quality Index, INFL is inflation and GDP is GDP growth rate.
Variables 1 2 3
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MB 0.004*** (0.001) 0.003*** (0.001) 0.003*** (0.001)

LEV -0.061*** (0.006) -0.062*** (0.006) -0.061*** (0.005)
CAPX 0.021 (0.019) 0.021 (0.018) 0.023* (0.014)
SIZE -0.005*** (0.002) -0.005** (0.002) -0.005*** (0.002)
CF 0.065*** (0.013) 0.065*** (0.013) 0.072*** (0.014)
CC 0.011*** (0.002) 0.010*** (0.002)
INFL -0.001*** (0.000)
GDP 0.002*** (0.000)
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INS -0.004*** (0.001)
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GDS -0.000 (0.000)
SMT -0.000*** (0.000)
CR
LL 0.001*** (0.000)
Observations 38763 38763 38763
Ad R Squared 0.04 0.05 0.09
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F- Statistics 221.3 196.1 36.92
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4.2.2. Corruption and Cash Value
Table 5 shows the result of panel data regression of corruption and cash value. The firm specific variables
are significant and signs are consistent with the previous empirical literature (Ararat et al., 2017; Black et
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al., 2012; Lee & Dav id, 2009). The variable profitability (ROA) is positively related to the firm value. And,
the variables firm size (SIZE), cap ital expenditure (CAPX) and leverage (LEV) are negatively related to the
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firm value. However, the variable asset tangibility (ATANG) does not show any significanc e in any of the
specifications. The corruption variable (TI), it is negatively related to the firm value (in specifications 2 and
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5 of table 5). However the relationship is not very strong as TI is significant at 10% level and 5% level in
specification 5 and 2 of table 5 respectively. However, fro m this result, we can infer that the corruption
level in the economy is negatively related to the firm value. Though, the relationship is not very strong, still
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it is important in this context.

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Table 5: Panel Data Regression: Corruption and Cash Value

The dependent variable is market-to-book ratio (MB). Country fixed effects and firm fixed effects are
included. Standard errors are heteroscedasticity robust Rogers standard errors and are clustered by both
firm and industry. ***, ** and * denote significance at 0.01, 0.05 and 0.10 levels respectively. CH is cash
holdings, LEV is market leverage, CAPX is capital expenditure, SIZE is firm size, ATANG is asset
tangibility, ROA is return on assets, TI is Transparency International’s Corruption Perception Index, LL is
country’s liquid liability to GDP ratio, GDS is gross domestic savings, INS is insurance penetration, SMT
is stock market turnover rat io, RL is Ru le of Law Index, RQ is Regulatory Quality Index, INFL is inflation
and GDP is GDP growth rate.
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Variables 1 2 3 4 5
-0.266*** -0.272*** -0.253*** -0.255*** -0.241***
SIZE (0.027) (0.028) (0.028) (0.028) (0.028)
CH 0.416*** (0.106) 0.432*** (0.107) 0.364*** (0.107) 0.368*** (0.107) 0.419*** (0.105)
2.5468***
ROA 2.550*** (0.130) 2.552*** (0.132) (0.127) 2.532*** (0.127) 2.475*** (0.133)
-0.410*** -0.425*** -0.328*** -0.319*** -0.307***
CAPX (0.088) (0.085) (0.099) (0.097) (0.089)
-0.938*** -0.929*** -0.936*** -0.929*** -0.944***
LEV (0.048) (0.050) (0.052) (0.049) (0.047)
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ATANG 0.029 (0.102) 0.030 (0.104) 0.013 (0.107) 0.013 (0.108) 0.005 (0.105)
**
TI -0.003 (0.001) -0.000 (0.002) 0.001 (0.002) -0.004* (0.002)
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INFL 0.008 (0.007) 0.008 (0.007) 0.008 (0.007)
*** ***
GDP 0.011 (0.001) 0.009 (0.001) 0.010*** (0.001)
CR
INS 0.039*** (0.009) 0.036*** (0.008) 0.040*** (0.009)
GDS 0.011*** (0.003) 0.012*** (0.003) 0.013*** (0.003)
-0.003*** -0.003*** -0.003***
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SMT (0.000) (0.000) (0.000)
LL -0.001 (0.001) -0.001 (0.001) -0.001 (0.001)
-0.072***
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RQ (0.023)
-0.258***
RL (0.049)
Observations 38763 38763 38763 38763 38763
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Ad R
Squared 0.15 0.15 0.18 0.18 0.18
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F- Statistics 395.3 597.7 543.5 205.3 205.1
The governance indicators i.e. rule of law (RL) and regulatory effectiveness (RQ) are negatively related to
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the firm value and are significant at 1% level. This negative relat ionship indicates that the weaker rule of
law and regulatory effect iveness have an adverse effect on firm value. Most of the other country level
control variables are also significant consistent throughout all the specifications. The variables GDP g rowth
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rate (GDP G), insurance penetration (INS) and gross domestic savings (GDS) are pos itively related to the
firm value and are significant at 1% level. While, the variab le stock market turnover ratio (SMT) is
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negatively related to the firm value.
Table 6: Panel Data Regression: Corruption and Cash Value (Legal Origin 0)
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is stock market turnover rat io, RL is Ru le of Law Index, RQ is Regulatory Quality Index, INFL is inflation
Variables 1 2 3 4 5
-0.331*** -0.336*** -0.299*** -0.294*** -0.299***
SIZE (0.038) (0.039) (0.034) (0.033) (0.034)
CH 0.213 (0.222) 0.228 (0.222) -0.083 (0.262) -0.103 (0.263) -0.024 (0.257)
*** *** *** ***
ROA 2.695 (0.235) 2.699 (0.238) 2.693 (0.246) 2.723 (0.254) 2.639*** (0.256)
CAPX -0.077 (0.193) -0.095 (0.185) -0.050 (0.215) 0.022 (0.213) 0.051 (0.212)
-0.917*** -0.909*** -0.935*** -0.952*** -0.913***
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LEV (0.089) (0.089) (0.099) (0.099) (0.095)
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ATANG 0.181 (0.153) 0.189 (0.158) 0.085 (0.182) 0.076 (0.182) 0.090 (0.180)
*
TI -0.002 (0.002) -0.001 (0.002) -0.003 (0.002) -0.004* (0.002)
0.044*** (0.006) 0.047*** (0.007) 0.040*** (0.006)
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INFL
GDP 0.017*** (0.003) 0.018*** (0.003) 0.019*** (0.003)
INS 0.092*** (0.012) 0.093*** (0.012) 0.091*** (0.012)
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GDS 0.011** (0.004) 0.012** (0.004) 0.009** (0.004)
-0.004*** -0.004*** -0.004***
SMT (0.000) (0.000) (0.000)
LL 0.003** (0.001) 0.003** (0.001) 0.003** (0.002)
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-0.099***
RQ (0.029)
-0.212***
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RL (0.041)
Observations 19660 19660 19660 19660 19660
Ad R
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Squared 0.13 0.13 0.18 0.19 0.19

F- Statistics 607.1 582.9 588.1 530.9 2420
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Table 7: Panel Data Regression: Corruption and Cash Value (Legal Origin 1)
The sample includes 2038 firms with 19103 firm year observations from 5 Emerging Market economies.
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is stock market turnover ratio, RL is Rule of Law Index, RQ is Regulatory Quality Index, INFL is inflation
Variables 1 2 3 4 5
-0.222*** -0.229*** -0.206*** -0.198*** -0.165***
SIZE (0.031) (0.033) (0.033) (0.032) (0.033)
CH 0.662*** (0.074) 0.664*** (0.067) 0.757*** (0.068) 0.732*** (0.066) 0.759*** (0.064)
ROA 2.448*** (0.159) 2.451*** (0.161) 2.462*** (0.165) 2.427*** (0.172) 2.355*** (0.167)
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-0.646*** -0.655*** -0.634*** -0.578*** -0.533***

CAPX (0.094) (0.093) (0.102) (0.103) (0.090)
-0.953*** -0.945*** -0.977*** -0.986*** -1.055***
LEV (0.053) (0.055) (0.048) (0.043) (0.041)
ATANG -0.059 (0.106) -0.073 (0.111) -0.084 (0.107) -0.099 (0.105) -0.114 (0.101)
** *
TI -0.009 (0.004) -0.007 (0.004) -0.006 (0.004) -0.009** (0.004)
INFL 0.015* (0.003) 0.015* (0.009) -0.011 (0.008)
-0.011***
GDP 0.005 (0.003) (0.003) -0.004 (0.003)
INS 0.014 (0.011) -0.007 (0.009) 0.019* (0.011)
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GDS 0.009*** (0.003) 0.019*** (0.003) 0.013*** (0.003)
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SMT -0.001** (0.001) -0.002** (0.001) -0.002** (0.001)
-0.005*** -0.007*** -0.007***
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LL (0.002) (0.002) (0.002)
-0.314***
RQ (0.045)
-0.440***
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RL (0.099)
Observations 19103 19103 19103 19103 19103
Ad R
Squared 0.19 0.19 0.20 0.21 0.21
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F- Statistics 473.2 507.3 5657 585.8 285.8
The main variable of interest is cash holding and its relationship to firm value. The variable cash holding
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(CH) is positively related to the firm value and is h ighly significant in all the specificat ions of the Tab le 5.
This indicates that cash holding does add value to the firm. Ho wever, this relat ionship is contingent on
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institutional factors like investor protection. When the sample is div ided based on the legal origin, the value
adding effect of cash holdings get reduced. Specifically, the cash holdings in Table 6 (LO 0) is not
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significant in any of the specification where investor protection is lo w when co mpared to other sub -sample
with legal orig in 1 (Tab le 7) where cash holding is positively related to the firm value and is significant in
all the specifications (Table 7).
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Overall, the relationship between firm value and cash holdings is contingent on the institutional factors like
corruption and investor protection. The value effect of cash is not significant when the firms are operating
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in an environment of high corruption with low investor protection.
5. Conclusion
The literature suggests the importance of firm related factors and institutional factors in determin ing the
firm financial policies. In this study, we focus on corruption and tested the effect of corruption on cash
holdings and cash value. Our results on the effect of corruption on cash holdings provide evidence that the
firms in emerging market economies favor mo re liquid financial policy with regards to cash holdings. By
managing the cash holdings upwards, firms can benefit fro m the corrupt environ ment by trading cash.
These results are also robust to the various sub-sample analyses and also to the alternate measure of
corruption. In addition, we examined how cash holdings add value to the firm and how this relationship is
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contingent to the other factors like corruption and weak investor protection. Overall, our result provides
evidence that the cash holdings add value to the firm. However, th is relationship is contingent on
institutional factors like corruption and investor protection. The value effect of cash is not significant when
the firms are operating in an environment of high corruption with low investor protection.
Overall, the results obtained in this study provide important imp lications for academic researchers,
managers and policy-makers. For researchers, it is expected to consider corruption as an important
determinant of corporate liquidity and its value and hence corruption should be included in future st udies
on cash holdings and cash value. For managers, it is important to consider the adverse effect of corruption
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on firm’s cash holdings and it’s value. Specifically, the firms should consider corruption when maintaining
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optimal cash holdings. Excess cash can be value reducing in a corrupt environ ment with lo w investor
protection. In addition, the managers of the mu ltinational corporations should consider the possible effect
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of different level of corruption, as well as their interaction when maintaining optimal cash holdings in
foreign countries. The result of this study provides empirical evidence that the level of corruption in an
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economy has an adverse effect of corporate liquidity and cash value. Hence, policy-makers should take
appropriate measures to curb the level of corruption in the economy. Specifically, the policy-makers should
try to strengthen the security laws, corporate governance mechanisms and their imp lementation to improve
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the overall investor protection in the economy. Th is will help in mit igating various agency problems and
facilitate firms to take optimal financial decisions and achieve higher valuations.
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Though a detailed analysis is carried out and a series of robustness checks has been performed, the study
can further be enriched and suggests the scope for the future research. First, to the extent that corporate
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cash holding decisions are dynamic in nature, emp loying dynamic panel data methods might improve the
overall understandings of the results. Second, additional institution al factors can be considered and their
impact on corporate liquid ity can be examined. In addition, the corporate governance variables can be
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included to check if they play any moderating role. Finally, more data is always desirable and study can be
further extended to frontier markets and developing economies .
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Appendi x A: Variables, Definitions and Data Sources
S.No. Variable Definition Data Source

1 CH Cash Holdings: Cash & Cash Equivalents to Total Assets Bloomberg
2 LEV Market Leverage: Total Debt to Total Common Equity + Total Debt Bloomberg
3 MB Market to Book Ratio: Market Capitalisation - Total Debt to Total Assets
P TBloomberg
4
5
CAPX
SIZE
Capital Expenditure to Total Assets
Log of Total Assets
R I Bloomberg
Bloomberg
C
6 CF Cash Flow: EBITDA - Interest Expense to Total Assets Bloomberg
S
7 ATANG Asset Tangibility: Property Plant & Equipment to Total Assets Bloomberg
8 ROA Return on Assets: Net Income to Total Assets Bloomberg
9
10
TI
CC
N U
Corruption Perception Index ranging 0 to 100. Higher value indicates more corruption
Control of Corruption Index ranging 0 to 10. Higher value indicates more corruption
Transparency International
World Bank
11 LL Country's Liquid Liability to GDP
A International Financial Statistics, IMF
12
13
GDS
INS
Gross Domestic Savings to GDP
Insurance Penetration: Total Insurance Premiums to GDPM World Bank
International Financial Statistics, IMF
14
15
SMT
LO
Stock Maket Turnover Ratio
Country's Legal Origin
E D International Financial Statistics, IMF
Treisman (2000)
16
17
RL
RQ
P T
Rule of Law Index ranging 0 to 10. Higher value indicates severe problem
Regulatory Quality Index ranging 0 to 10. Higher value indicates severe problem
World Bank
World Bank
18
19
INFL
GDP
Inflation
GDP growth rate
C E World Bank
World Bank
A C
Appendi x B: Country-wise summary (Mean) of all the variables
ACCEPTED MANUSCRIPT
S.No. Variables Brazil Chile China Egypt Greece India Indonesia Malaysia Mexico P akistan P hilippines P oland South Africa South Korea Thailand Turkey
1 CH 0.05 0.05 0.12 0.08 0.05 0.03 0.07 0.09 0.05 0.05 0.07 0.07 0.08 0.05 0.06 0.06
2 LEV 0.37 0.30 0.36 0.32 0.39 0.43 0.40 0.29 0.33 0.42 0.30 0.29 0.31 0.39 0.35 0.34
T
3 MB 0.48 0.59 1.07 0.62 0.30 0.48 0.44 0.39 0.45 0.38 0.56 0.67 0.61 0.20 0.56 0.48
4 CAP X -0.04 -0.05 -0.05 -0.04 -0.04 -0.07 -0.05 -0.04 -0.04 -0.08 -0.05 -0.05 -0.05 -0.05 -0.05 -0.05
5 SIZE 19.26 18.99 19.09 18.65 18.74 18.63 18.53 18.16 19.30 18.60 18.75
I
18.23
P 18.77 19.14 18.19 18.89
7
CF
ATANG
0.07
0.35
0.08
0.44
0.06
0.36
0.07
0.39
0.07
0.39
0.08
0.37
0.08
0.39
0.07
0.39
0.08
0.41
0.12
0.47
C
0.07
0.39
R0.08
0.34
0.10
0.33
0.06
0.39
0.08
0.38
0.07
0.37
S
8 ROA 0.04 0.04 0.03 0.05 0.02 0.04 0.03 0.03 0.04 0.06 0.03 0.03 0.05 0.03 0.05 0.03
9 TI 60.33 28.44 64.63 68.07 59.65 65.61 72.02 51.24 66.38 76.14 71.75 46.48 54.95 48.48 64.59 55.67
10
11
CC
LL
5.20
71.71
2.10
48.01
5.98
122.01
6.29
77.21
4.96
93.60
5.88
71.42
6.43
45.38
4.63
118.19
5.78
53.15
N U
6.92
47.89
6.26
62.62
3.94
57.60
4.70
56.92
3.99
67.24
5.69
97.82
4.95
54.26
12 GDS 27.38 29.67 42.72 16.52 16.42 33.25 31.96 38.59
A
27.92 15.59 21.67 22.70 25.88 33.68 30.95 26.65
M
13 INS 2.81 3.48 2.80 1.37 2.42 3.29 1.89 4.22 2.56 1.11 2.03 3.15 8.70 7.83 3.92 1.80
14 SMT 57.94 26.33 119.58 43.11 47.08 67.33 39.82 34.73 42.59 166.96 29.34 41.06 40.48 139.49 78.08 125.82
15
16
LO
RL
0.00
5.23
0.00
2.33
0.00
6.00
0.00
5.72
0.00
3.83
1.00
5.03
E D
0.00
6.23
1.00
4.06
0.00
5.96
1.00
6.72
0.00
5.93
0.00
3.59
1.00
4.73
0.00
3.09
1.00
5.20
0.00
4.91
17
18
RQ
INFL
4.92
4.96
2.08
3.34
5.47
3.10
5.93
8.40
3.70
2.28
P T
5.78
7.24
5.74
6.14
3.86
2.58
4.28
3.92
6.28
9.26
5.25
4.09
3.11
2.45
4.08
4.83
3.31
3.33
4.52
2.70
4.33
6.90
19 GDP 4.06 4.53 8.78 4.33
C E -0.36 7.01 5.51 5.10 4.21 4.42 5.37 3.81 4.07
Note: CH is cash holdings, LEV is market leverage, M B is market-to-book ratio, CAPX is capital expenditure, SIZE is firm size, CF is cash flow, ATANG is
4.55 4.06 5.51
A C
asset tangibility, ROA is return on assets, TI is Transparency International’s Corruption Perception Index, CC is World Bank’ s Control of Corruption Index, LL
is country’s liquid liability to GDP ratio, GDS is gross domestic savings, INS is insurance penetration, SMT is stock market turnover ratio, LO is legal origin, RL
is Rule of Law Index, RQ is Regulatory Quality Index, INFL is inflation and GDP is GDP growth rate.
Appendi x C: Correlation Matrix

ACCEPTED MANUSCRIPT
Variables 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
CH (1) 1.00
LEV (2) -0.29 1.00
MB (3) 0.28 -0.39 1.00
CAPX (4) 0.02 -0.02 -0.11 1.00
SIZE (5) -0.05 0.16 -0.06 0.03 1.00
P T
CF (6)
ATANG (7)
ROA (8)
0.13
-0.25
0.16
-0.30
0.12
-0.34
0.37
-0.09
0.37
-0.27
-0.32
-0.18
0.01
0.03
0.07
1.00
0.06
0.80
1.00
-0.08 1.00
R I
TI (9)
CC (10)
0.01
0.05
0.14
0.13
0.09
0.10
-0.09
-0.08
0.01
0.02
0.03
0.01
-0.01
-0.02
0.05
0.04
1.00
0.93 1.00
S C
LL (11)
GDS (12)
0.31
0.21
-0.08
0.01
0.13
0.15
0.04
-0.02
-0.09
0.05
-0.09
-0.07
-0.01
0.00
-0.05
-0.03
-0.03
-0.03
N U
0.07
0.09
1.00
0.56 1.00
INS (13) -0.04 -0.05 -0.09 0.02 0.01 0.02 -0.03 0.01 -0.43
A -0.46 -0.07 0.10 1.00
M
SMT (14) 0.05 0.08 0.04 -0.05 0.15 -0.03 0.00 -0.01 0.11 0.10 0.09 0.25 0.19 1.00
LO (15) -0.11 0.00 -0.08 -0.06 -0.25 0.06 0.01 0.06 0.04 0.08 0.17 0.14 0.16 -0.26 1.00
RL (16)
RQ (17)
0.13
0.01
0.08
0.16
0.16
0.11
-0.06
-0.10
0.06
0.06
0.01
0.01
E D
-0.03
-0.02
0.04
0.04
0.83
0.84
0.91
0.91
0.07
-0.01
0.14
0.16
-0.48
-0.43
0.11
0.13
-0.05
0.12
1.00
0.85 1.00
INFL (18)
GDP (19)
-0.17
0.16
0.12
0.05
-0.02
0.19
-0.14
-0.09
0.01
0.06
P T
0.08
-0.02
0.01
0.00
0.07
0.00
0.36
0.20
0.37
0.26
-0.45
0.20
-0.17
0.63
-0.16
-0.15
-0.01
0.28
0.14
0.02
0.29
0.34
0.48
0.37
1.00
0.17
C E
Note: CH is cash holdings, LEV is market leverage, M B is market-to-book ratio, CAPX is capital expenditure, SIZE is firm size, CF is cash flow, ATANG is
asset tangibility, ROA is return on assets, TI is Transparency International’s Corruption Perception Index, CC is World Bank’s Control of Corruption Index, LL
A C
is country’s liquid liability to GDP ratio, GDS is gross domestic savings, INS is insurance penetration, SMT is stock market turnover ratio, LO is legal origin, RL
is Rule of Law Index, RQ is Regulatory Quality Index, INFL is inflation and GDP is GDP growth rate.
Appendi x D: Panel Data Regression- Cash Holdings and Corruption (Legal Origin 0)
The sample includes 2198 firms with 19660 firm year observations from 11 Emerg ing Market economies with civil law origin. The dependent variable is cash
holdings (CH). Country fixed effects and firm fixed effects are included. Standard erro rs are heteroscedasticity robust Rogers standard errors and are clustered by
ACCEPTED MANUSCRIPT
both firm and industry. ***, ** and * denote significance at 0.01, 0.05 and 0.10 levels respectively. CH is cash holdings, LEV is market leverage, MB is market -
to-book ratio, CAPX is capital expenditure, SIZE is firm size, CF is cash flow, TI is Transparency International’s Corruption Pe rception Index, LL is country’s
liquid liab ility to GDP ratio, GDS is gross domestic savings, INS is insurance penetration, SMT is stock market turnover ratio, RL is Rule of Law Index, RQ is
Variables 1 2 3 4 5
MB 0.002 (0.002) 0.002 (0.002) 0.000 (0.002)
T
0.001 (0.002)
P
0.000 (0.002)
I
*** *** *** ***
LEV -0.064 (0.011) -0.067 (0.011) -0.076 (0.009) -0.078 (0.009) -0.077*** (0.009)
R
CAPX -0.017 (0.036) -0.007 (0.037) 0.033 (0.024) 0.031 (0.024) 0.033 (0.024)
*** *** *** ***
SIZE -0.016 (0.003) -0.013 (0.003) -0.007 (0.003) -0.007 (0.003) -0.007*** (0.002)
CF
TI
0.064*** (0.018) 0.060*** (0.019)
0.001*** (0.000)
0.069*** (0.023)
0.001*** (0.000)
S C 0.072*** (0.023)
0.001*** (0.000)
0.071*** (0.024)
0.001*** (0.000)
INFL
GDP
N
0.001
U
-0.001* (0.000)
***
(0.000)
-0.001*** (0.000)
0.001***
(0.000)
-0.001 (0.000)
0.001*** (0.000)
INS
A-0.005*** (0.001) -0.005*** (0.001) -0.005*** (0.001)
GDS
SMT M 0.000*** (0.000)
-0.000*** (0.000)
0.001*** (0.000)
-0.000*** (0.000)
0.001*** (0.000)
-0.000*** (0.000)
LL
RQ
E D 0.001*** (0.000) 0.001*** (0.000)
0.008*** (0.003)
0.001*** (0.000)
RL
Observations 19660
P T 19660 19660 19660
0.015*** (0.002)
19660
Ad R Squared
F- Statistics
0.04
275.8
C E 0.05
458.8
0.14
54.7
0.14
87.45
0.14
218.7
A C
Appendi x E: Panel Data Regression- Cash Holdings and Corruption (Legal Origin 1)
The sample includes 2038 firms with 19103 firm year observations fro m 5 Emerg ing Market econo mies with co mmon law origin. The dependent variable is cash
holdings (CH). Country fixed effects and firm fixed effects are included. Standard erro rs are heteroscedasticity robust Rogers standard errors and are clustered by
both firm and industry. ***, ** and * denote significance at 0.01, 0.05 and 0.10 levels respectively. CH is cash holdings, LEV is market leverage, MB is market -
ACCEPTED MANUSCRIPT
to-book ratio, CAPX is capital expenditure, SIZE is firm size, CF is cash flow, TI is Transparency International’s Corruption Pe rception Index, LL is country’s
liquid liab ility to GDP ratio, GDS is gross domestic savings, INS is insurance penetration, SMT is stock market turnover ratio, RL is Rule of Law Index, RQ is
Variables 1 2 3 4 5
*** *** *** *** ***
MB 0.006 (0.001) 0.006 (0.001) 0.006 (0.001) 0.006 (0.001) 0.007 (0.001)
LEV -0.059 ***
(0.009) -0.059 ***
(0.009) -0.053 ***
(0.008) -0.053 ***
P T
(0.009) -0.052 ***
(0.009)
CAPX
SIZE
0.044***
0.006 (0.002)
(0.006) 0.044 ***
(0.006)
0.003 (0.002)
0.032***
0.001 (0.002)
(0.007)
I
0.033
R
***
0.001 (0.002)
(0.007) 0.031 ***
(0.007)
-0.001 (0.002)
CF
TI
0.068*** (0.013) 0.067*** (0.013)
0.000 (0.000)
0.070*** (0.012)
0.000 (0.000)
S C 0.070*** (0.012)
0.000 (0.000)
0.071*** (0.012)
0.000 (0.000)
U
INFL -0.000 (0.000) 0.000 (0.000) -0.000 (0.000)
** **
GDP 0.001 (0.000) 0.000 (0.000) 0.001*** (0.000)
INS
GDS
A
-0.002 ***
N
-0.000 (0.000)
(0.000)
-0.000 (0.000)
-0.002 ***
(0.000)
-0.000 (0.000)
-0.002*** (0.000)
SMT
M 0.000 (0.000)
0.001** (0.000)
0.000 (0.000)
0.003** (0.000)
-0.000*** (0.000)
0.000** (0.000)
D
LL
E
RQ -0.002 (0.002)
T
RL 0.005 (0.005)
Observations 19103 19103 19103 19103 19103
Ad R Squared
F- Statistics
0.05
41.72
E P 0.05
37.88
0.07
12.91
0.07
17.43
0.07
20.23
C C
A
Appendi x F: Panel Data Regression- Cash Holdings and Corruption (Asia)
The sample includes 3163 firms with 29654 firm year observations from 8 Asian Emerging Market economies. The dependent variable is cash holdings (CH).
Country fixed effects and firm fixed effects are included. Standard errors are heteroscedasticity robust Rogers standard erro rs and are clustered by both firm and
industry. ***, ** and * denote significance at 0.01, 0.05 and 0.10 levels respectively. CH is cash holdings, LEV is market leverage, MB is market -to-book ratio,
CAPX is capital expenditure, SIZE is firm size, CF is cash flow, TI is Transparency International’s Corruption Perception Index, LL is country’s liquid liability
ACCEPTED MANUSCRIPT
to GDP ratio, GDS is gross domestic savings, INS is insurance penetration, SMT is stock market turnover ratio, RL is Rule of Law Index, RQ is Regulatory
Quality Index, INFL is inflation and GDP is GDP growth rate.
Variables 1 2 3 4 5
*** *** *** *** ***
MB 0.003 (0.001) 0.004 (0.001) 0.003 (0.001) 0.003 (0.001) 0.004 (0.001)
T
*** *** *** *** ***
LEV -0.065 (0.006) -0.068 (0.006) -0.066 (0.005) -0.066 (0.005) -0.064 (0.005)
P
* * *
CAPX 0.014 (0.021) 0.017 (0.020) 0.026 (0.013) 0.025 (0.013) 0.024 (0.012)
SIZE
CF
-0.007 ***
(0.002)
0.062*** (0.014)
-0.005 **
(0.002)
0.059*** (0.014)
-0.002 (0.002)
0.066*** (0.015)
R I-0.002 (0.002)
0.066*** (0.015)
-0.003* (0.002)
0.068*** (0.015)
TI
INFL
0.001*** (0.000) 0.001*** (0.000)
-0.001*** (0.000)
S C 0.001*** (0.000)
-0.001*** (0.000)
0.000* (0.000)
-0.001*** (0.000)
GDP
INS
N U
0.001*** (0.000)
-0.008*** (0.002)
0.001*** (0.000)
-0.008*** (0.002)
0.001*** (0.000)
-0.008*** (0.002)
GDS
A 0.000 (0.000)
-0.000*** (0.000)
0.000 (0.000)
-0.000*** (0.000)
0.000 (0.000)
-0.000*** (0.000)
M
SMT
LL 0.001*** (0.000) 0.001*** (0.000) 0.001*** (0.000)
RQ
RL
E D 0.002 (0.002)
0.017*** (0.003)
Observations
Ad R Squared
29654
0.05
P T 29654
0.05
29654
0.11
29654
0.11
29654
0.12
F- Statistics 496
C E 402 27 62.07 57.21
A C
Appendi x G: Panel Data Regression- Cash Holdings and Corruption (Rest-of-Sample)
The sample includes 1073 firms with 9109 firm year observations from 8 Emerging Market economies. The dependent variable is cash holdings (CH). Country
fixed effects and firm fixed effects are included. Standard errors are heteroscedasticity robust Rogers standard errors and a re clustered by both firm and industry.
***, ** and * denote significance at 0.01, 0.05 and 0.10 levels respectively. CH is cash holdings, LEV is market leverage, M B is market -to-book ratio, CAPX is
capital expenditure, SIZE is firm size, CF is cash flow, TI is Transparency International’s Corruption Perc eption Index, LL is country’s liquid liability to GDP
ratio, GDS is gross domestic savings, INS is insurance penetration, SMT is stock market turnover rat io, RL is Rule o f Law Ind ex, RQ is Regulatory Quality
ACCEPTED MANUSCRIPT
Index, INFL is inflation and GDP is GDP growth rate.
Variables 1 2 3 4 5
*** *** *** *** **
MB 0.004 (0.001) 0.003 (0.001) 0.003 (0.001) 0.003 (0.001) 0.003 (0.001)
*** *** *** *** ***
LEV -0.043 (0.008) -0.044 (0.008) -0.043 (0.007) -0.044 (0.007) -0.044 (0.007)
CAPX 0.049 **
(0.019) 0.058 **
(0.027) 0.059 **
(0.027) *
0.057 (0.027)
P T 0.058 **
(0.027)
I
SIZE 0.000 (0.002) 0.001 (0.002) 0.002 (0.002) 0.001 (0.002) 0.001 (0.002)
CF 0.075*** (0.019) 0.075*** (0.020) 0.074*** (0.019) 0.076*** (0.019) 0.077*** (0.019)
TI
INFL
0.001*** (0.000) 0.001*** (0.000)
-0.000 (0.001)
CR 0.001*** (0.000)
-0.000 (0.001)
0.000** (0.000)
-0.000 (0.001)
GDP
INS
0.000 (0.000)
0.004***
U (0.001)
S 0.000 (0.000)
0.004***
(0.001)
0.000 (0.000)
0.003*** (0.001)
GDS
SMT
A N
-0.000 (0.000)
0.000 (0.000)
-0.000 (0.000)
0.000 (0.000)
-0.000 (0.000)
0.000 (0.000)
M
LL 0.000 (0.000) 0.000 (0.000) 0.000 (0.000)
*
RQ 0.005 (0.002)
RL
Observations 9109 9109
E D 9109 9109
0.008*** (0.003)
9109
Ad R Squared
F- Statistics
0.03
62.78
P T 0.04
48.49
0.04
28.74
0.04
8.76
0.09
34.31
C E
A C
ACCEPTED MANUSCRIPT
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Highlights
 This study examines the effect of corruption on cash holdings and cash value.
 The cash holdings are positively related to the corruption.
 By managing cash holdings upwards, firms can benefit in the corrupt
environment.
 In addition, cash holding adds value to the firms.
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
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However, the relationship is insignificant in low investor protection environment.
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AN
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Corruption and Cash Holdings Evidence From Emerging Market

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Corruption and cash holdings: Evidence from emerging market

Bhanu Pratap Singh Thakur, M. Kannadhasan

Corruption and Cash Holdings: Evidence from Emerging Market Economies

Bhanu Pratap Singh Thakur* , M Kannadhasan

Corruption and Cash Holdings: Evidence from Emerging Market Economies

2. Literature Review and Hypothesis Development

2.1. Cash Holdings

2.2. Corruption and Cash Holdings

corruption and cash value.

3. Data and Methodology

3.2.1. Cash Holdings and Firm Value

S.No Country No. of Firms Firm Years

14 South Korea 350 3250

16 Turkey 132 1053

3.2.3. Firm Specific Control Variables

3.2.4. Country Specific Control Variables

Yit = β0 + βXit + γZt + eit

Table 2: Summary Statistics- Full Sample

S.No. Variables N Min Max Mean SD

1 CH 38763 -0.09 0.64 0.07 0.07

4 CAPX 38763 -0.44 0.03 -0.05 0.05

7 ATANG 38763 0.00 0.97 0.38 0.16

10 CC 38763 1.82 7.29 5.27 0.94

Table 3: Panel Data Regression: Cash Holdings and Corruption

TI 0.001*** (0.000) 0.001*** (0.000) 0.001*** (0.000) 0.001*** (0.000)

GDP 0.001*** (0.000) 0.002*** (0.000) 0.001*** (0.000)

GDS -0.000 (0.000) -0.000 (0.000) -0.000 (0.000)

correlation with the corruption variable (CC).

MB 0.004*** (0.001) 0.003*** (0.001) 0.003*** (0.001)

it is important in this context.

Table 5: Panel Data Regression: Corruption and Cash Value

F- Statistics 395.3 597.7 543.5 205.3 205.1

negatively related to the firm value.

Squared 0.13 0.13 0.18 0.19 0.19

-0.646*** -0.655*** -0.634*** -0.578*** -0.533***

in an environment of high corruption with low investor protection.

Appendi x A: Variables, Definitions and Data Sources

S.No. Variable Definition Data Source

12 GDS 27.38 29.67 42.72 16.52 16.42 33.25 31.96 38.59

19 GDP 4.06 4.53 8.78 4.33

C E -0.36 7.01 5.51 5.10 4.21 4.42 5.37 3.81 4.07

Appendi x C: Correlation Matrix

C E 402 27 62.07 57.21

Index, INFL is inflation and GDP is GDP growth rate.

Journal of Law, Economics, and Organization, 29(2), 332–354. https://doi.org/10.1093/jleo/ewr018

country-specific determinants. Journal of Banking and Finance, 32(9), 1954–1969.

Corruption and Cash Holdings: Evidence from Emerging Market Economies

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TI 0.001* (0.000) 0.001* (0.000) 0.001* (0.000) 0.001* (0.000)

GDP 0.001* (0.000) 0.002* (0.000) 0.001*** (0.000)

MB 0.004* (0.001) 0.003* (0.001) 0.003*** (0.001)

-0.646* -0.655* -0.634* -0.578* -0.533***