The role of institutional environments on the link between firm size and corporate cash holding
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2020-05-07
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en
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Abstract
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.
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Faculteit der Managementwetenschappen