Securities Laws, Control of Corruption, and Corporate Liquidity: International Evidence

Manuscript Type: Empirical Research Question/Issue: Previous studies have reported the relationship between corporate governance and corporate liquidity (cash holdings). Factors affecting corporate governance, such as securities laws and control of corruption, should have bearing on corporate liquidity and its value. This study focuses on national-level predictors of cash holdings such as securities laws and control of corruption and examines their impact on corporate liquidity, as well as its value from the agency perspective. Research Findings/Insights: Using comprehensive data on 47 countries from 1996-2007, this study demonstrates that when benchmark variables are controlled, corporate liquidity is lower in countries with more effective securities laws or higher control of corruption. In addition, cash can increase firm value. This positive relation is more pronounced in countries with effective securities laws or high control of corruption. Furthermore, excess cash can reduce firm value in countries with ineffective securities laws or low control of corruption as opposed to other countries; however, this value-reducing effect can be mitigated or reversed when control of corruption or securities laws improve. Theoretical/Academic Implications: This study establishes that securities laws and control of corruption, in addition to the traditional cash determinants, play important roles in determining corporate liquidity and its value, and should therefore not be ignored in future liquidity studies. In addition, securities laws and control of corruption reinforce each other in the reduction of internal agency problems. Furthermore, this study provides empirical support for agency theory to explain corporate cash holdings. Practitioner/Policy Implications: Multinational firms should consider the potential impact of different securities laws and control of corruption of foreign countries in deciding the amount of cash to hold. Results suggest that firms should decrease target cash level in countries with more effective securities laws or higher control of corruption because investor protection is stronger, and the agency problem is less severe. In addition, excess cash should not be held in countries with ineffective securities laws or low control of corruption because these circumstances can reduce firm value, unless these countries substantially improve their control of corruption or securities laws. As for policy makers, caution has to be exercised when improving securities laws or repressing corruption; the concurrent improvement of both is more effective for stronger investor protection and better corporate governance.