The role of institutional environments on the link between firm size and corporate cash holding

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This research was aimed at providing empirical evidences on the possible role of legal environments on the relationship between the size of firms and their cash holding due to the different investors’ protections provided by different legal systems. Using a sample of firms from Belgium, France and Italy to represent civil law countries, and those from Australia, Canada and the UK representing common law countries, the results propose a negative association between the size and cash holding of firms. Additionally, legal systems included in the study provide significant evidences that firms in civil law countries hold more non-cash current assets but less cash, compared to firms in civil law countries holding more cash but less non-cash current assets. Moreover, the research found significant evidences that legal systems moderate the role of firm size on cash holding, where cash as the measure for liquidity shows a weaker relationship for common law compared to civil law firms, whereas non-cash current assets show a stronger relationship for common laws firms compared to the civil law firms. The results of the study shed light on the free cash flow theory, suggesting that managers will likely keep more cash to increase their managerial power in countries with weak investors protection. Elsewhere, evidences on the agency problem in the free cash flow theory are provided, suggesting that investors in countries with strong protection are in favor of higher cash holdings, since they feel protected by the laws.
Faculteit der Managementwetenschappen