Investor’s Protection, Legal Origin, Economic Development and

the Time -Varying Predictors of Corporate Cash Holdings – A

Cross-country Study

Rajesh Pathak
Ranjan Das Gupta
Goa Institute of Management, Goa
Prelude
• The headlines on bulging Corporate Cash holdings (CCH) and its
significant variation around the world.

• The attempt of ‘Law and Finance Theory’ to combine insights from

the theory of corporate finance, legal and economic history.

• The theory of law and finance argues that the legal system that
countries have inherited from the past is crucial to the analysis of
firm’s behavior in the economy, the economic growth and financial
development (Graff, 2008)
What we do?
• We examine the role of investor’s protection, country-law, and the
state of economic development of a country, about the
predictableness of corporate cash holdings (CCH) in a cross-country
setting, amid the economic state of stability and turbulence.
Why we do what we do?
• Literature silent on country law and CCH linkages.

• Scarcely investigated the cross-country variations of CCH and the

reasons thereof.

• Nonexistent literature on the cross-country predictive consistency of

CCH’s widely accepted antecedents.
How we do it?
• Univariate analysis of CCH patterns across sample sub-classifications
based on investor’s protection, origin of law, state of economic
development and period of stability vs turbulence.

• Dummy variable and panel data regressions models with various

specifications.
Data, Variables and the Method
• We collect the data for annual financials and the other key literary idiosyncratic variables for firms
and countries from Bloomberg database as on 31 December each study year in US dollar terms.

• Our collected panel data consist of 3,197 unique firms from 10 developed and 8 emerging
countries for study years 2001-2017.

• Our initial sample consists of an unbalanced panel with 57,528 firm-year observations.

• We winsorize all the variables at the bottom and top 1% to mitigate the outlier effects and also
clean for missing values. Consequently, we investigate a final sample of 57,100 firm-year
observations.

• List of variables

• Basic form of model:

Classifications
Empirical Findings
CCH Patterns
CF CG DM
.05 .15
.1
0

EM PIR SIR
.05 .15
.1
0

2000 2005 2010 2015 2000 2005 2010 2015

common
.05 .15
.1
0

2000 2005 2010 2015

Year
Median Mean
IQR
Graphs across classifications of countries
More Patterns
More Patterns
More Patterns
Regression Estimates
Regression Estimates
Regression Estimates
Regression Estimates
Regression Estimates
Key Findings
• Australian and Chinese firms show highest cash ratios whereas Mexican and
Argentine firms exhibit most volatile cash ratios
• The cash holding of firms in Civil German-law countries overshadow their peers
from the Civil French and the Common-law countries.
• Firms from emerging economies, and from countries with strong investor’s
protection, hold more cash than the peers do and the same holds true for the
non-dividend-paying firms across.
• In consistence with precautionary motive, firms around the world hold higher
cash during crisis, except for firms in countries with poor investor’s rights.
• Interestingly, cash ratio exhibit a U-shaped pattern for quintiles based on firm’s
size, profitability and growth, implying non-linear linkages of CCH with these
variables.
• Most antecedents are inconsistent in their magnitude about predictability of CCH,
across homogenous sub-sample based analysis.
Conclusions
• Most predictors of cash holdings are non-consistent in terms of their
magnitude and direction through times and across countries.

• Predictability of various antecedents of cash holding is dynamic and its

magnitude largely depends on the legal environment, governance
structure, state of economy and the economic cycle, in which firms
operate.

• Levels of investor’s protection, state of economic development, period of

stability vs. crisis, origin of country-laws have significant role in determining
CCHs.
Thanks