University of Groningen
Creditor rights, Shareholder rights and
Corporate
Cash
Holdings
of
Multinationals: Worldwide Evidence.
Student: Wouter Witwerts Student number: s3458679 Supervisor: Dr. A. Dalò
Co-assessor: Prof. Dr. W. Bessler
Abstract
This paper seeks to explain differences in cash holdings policies of multinationals, compared to domestic corporations, located in stronger creditor- or shareholder right countries. Using a sample with 184,229 firm-year observations across 38 countries in the period 1990-2017, we find that multinationality decreases corporate cash holdings. This finding is robust to alternative measures of both cash holdings and multinationality. We further find that creditor rights increase and shareholder rights decrease corporate cash holdings. Overall, we find no robust evidence that multinationals, relative to domestic corporations, differ in cash policies in countries with stronger creditor- or shareholder rights. Hence, multinationals are not more successful in resisting pressures from investor protection mechanisms. This study introduces an interdisciplinary perspective in understanding a firm's financial policies, linking the literature of finance, governance, and theories of multinationals.
Keywords:
Cash management, Cash holdings, Multinationals, Creditor rights, International Capital Markets
JEL Classification:
2 At the end of 2017, U.S. non-financial firms brought their total liquid assets to a record of $2.1 trillion, while firms in Europe, the Middle East, and Africa recorded $1 trillion in corporate cash (Manzi et al., 2018). Especially big multinationals, such as Apple, Microsoft, and other firms, show in frequent media to have an upward trend in their cash reserves (Fernandes and Gonenc, 2016).
The literature explains this trend in corporate cash holdings with different motives. First, the precautionary motive induces that firms save cash to not miss future investment opportunities (Opler et al., 1999). Further, Keynes (1937) shows that firms hold cash to mitigate transaction costs of using external capital. Almeida et al. (2004) content that firms mitigate the adverse effects of financial constraints by adopting a policy of greater cash reserves.
3 important part of investor protection. These rights make sure that cash will be used in favor of shareholders as a result of reduced misappropriation by managers and are significantly related to cash holdings (Huang et al., 2013b).
This study aims to extend the literature of finance economics by testing whether the relation between cash holdings and multinationality depends on creditor- and shareholder rights. Direct effects of creditor- and shareholder rights on cash holdings have been investigated before (Seifert and Gonenc, 2016; Yung and Nafar, 2014). However, to our knowledge, no study examines the moderating effect of these country-level governance mechanisms on the relation between internalization and cash holdings.
The idea behind this expected moderation effect is hat MNCs or firms with a higher level of internalization will respond differently to the strength of a country's creditor- or shareholder rights in determining an optimal cash balance. MNCs possess capabilities, relative to DCs, to resist or adjust themselves to these country governance mechanisms. Therefore, in this study we ask the question:
What is the moderating effect of creditor- or shareholder rights on the relation between internalization and cash holdings?
First, this study examines the relation between internationalization and cash holdings. Since previous research presents contrasting results on the direction of this relation, we find the direction of this relation to be ambiguous1. Second, we examine the effect of
creditor rights on firms’ cash holdings. The existing literature support both a positive and
1 To give an example, Fernandes and Gonenc (2016) and Lee and Kwok (1988) present a significant negative
4 negative effect2. However, whether the increase of creditor rights will have different
effects on the cash holdings of MNCs is uncertain and is, to our knowledge, not investigated before. For that purpose, we a particular interested in examining the moderating effect of creditor rights on the relation between internalization and cash holdings. Next to creditor rights, we also explore whether shareholder rights affect cash holdings. More importantly, our second main concern is to investigate whether shareholder rights impact the relation between multinationality and cash holdings.
In this analysis, we focus on a worldwide sample including 184,229 firm-year observation of 19,461 unique firms in the period between 1990 and 2017. We find a significant and negative relation between cash holdings and multinationality. Further, our results show a positive significant effect of creditor rights and a negative significant effect of shareholder rights on cash holdings. Overall, our findings provide not enough evidence to infer that MNCs, relative to DCs, have different cash holdings in countries with strong creditor- or shareholder rights.
The structure of the paper is as follows: in section two we present the literature and derive the hypotheses of the study. Next, we discuss the data and methods used in this paper. Thereafter, the fourth section presents the results of the study. At last, we conclude the study and discuss the limitations and suggestions for future research.
2. Literature review and hypothesis development
The literature review can be motivated using four elements: i) The determinants of corporate cash holdings, ii) The effect of internalization on corporate cash holdings, iii) The moderating effect of creditor rights, and iv) The moderating effect of shareholder
2 To give an example, Seifert and Gonenc (2016) show that creditor rights decrease the level of cash holdings.
5 rights. In addition to the review of existing literature, this section also presents testable hypotheses.
i) Determinants of corporate cash holdings
Multiple studies investigated the optimal level of cash holding in corporations. The broad findings state that an optimal level of cash exists, but that it is hard to find. Opler et al. (1999) investigate 90,000 firms in the U.S. on the determinants of cash holdings and state that the optimal level of liquid-asset holdings rely on the marginal benefits and costs of every extra dollar. According to the classical study of Keynes (1937), there are two major benefits of cash holdings.
The first benefit is from a transaction cost motive, which means that firms can save transaction costs using cash to make payments (Keynes, 1937). Such transaction costs, but also agency problems, financial distress and asymmetric information all proof that there are capital market imperfections within an economy (Park et al., 2013). The presence of these financing frictions causes the costs of external finance to increase, which leads to firms investing less, and eventually decreases firm value (Fazzari et al., 1988). A way to overcome the constraint of high costs of external finance is to rely more on internal financial resources, such as cash reserves. Cash reserves enable firms to invest without the need for external capital markets, which in turn reduces the likelihood of financial distress costs as well (Keynes, 1937).
6 securities. Firms can avoid the shortage of liquid assets by having lower leverage, by hedging or by holding more cash (Opler et al., 1999).
Further, the role of cash reserves in creating financial flexibility received increasing attention in recent literature (Denis, 2011). Therefore, it could be a possible third benefit. The major advantage of a liquid balance sheet is that it allows firms to fund value-increasing investment projects when external sources of funds are not available or are excessively costly (Kyröläinen et al., 2013). It enables firms to avoid the costs of financial distress and mitigate the underinvestment problem. Opler et al. (1999) argue that in financially constraint firms, if the management has the opportunity to build up cash, they tend to do so. This also supports the precautionary motive, as firms hold liquid assets to ensure that they will be able to keep investing when external funds are too expensive or when cash flows are too low.
Next to the benefits, cash reserves induce costs as well. The cost of holding excess liquid assets includes the lower rate of return of these assets because of a liquidity premium and, possibly, tax disadvantages (Opler et al., 1999). Furthermore, self-interested managers could waste cash on value-decreasing projects when minority shareholders are not adequately protected (Kyröläinen et al., 2013).
ii) Multinational and cash holding
7 These financing frictions cause the cost of finance to increase which leads to higher cash holdings.
In previous literature, studies have examined the effect of internalization on cash holdings substantially. However, the literature gives ambiguous results. On the one hand, studies support the idea that MNCs have higher cash holdings because of the higher tax cost associated with repatriating foreign income. To give an example, Foley et al. (2007) state that the consolidated cash holdings of U.S. firms increase together with the level of repatriation taxes. Conversely, Pinkowitz et al. (2016) challenge these results and show that the increase in U.S. MNCs’ level of cash cannot be explained by tax treatment of profit repatriations, poor governance, or regulation.
Furthermore, Gao and Chou (2015) indicate that MNCs face inefficient resource allocation because they experience several disadvantages compared to DCs, such as higher coordination costs, bigger complexity in terms of management, and information asymmetry between divisional and corporate headquarter managers. Therefore, one may expect that when firms become more internationalized, managers might have a greater preference for cash as it mitigates risks from a precautionary motive. However, a more recent study of Fernandes and Gonenc (2016) state that MNCs with imperfectly correlated cash flows from different geographic regions have less need for precautionary cash reserves. The major argument here is that MNCs can make use of economies of scale in cash management. Duchin (2010) shows consistent results and proofs that MNCs have the possibility to transfer cash among subsidiaries across different divisions which lowers the need for corporate cash holding.
8 investment, mergers & acquisitions), MNCs can reduce the cost of capital3 (Gao and Chou,
2015). Therefore, MNCs are better positioned to finance riskier R&D projects as corporate headquarters could better plan firms' cash needs. This, in turn, allows MNCs to hold less precautionary cash as they are more financially flexible (Opler et al., 1999). Since literature proof an effect of internalization on cash holdings, however because the direction of this effect is ambiguous, we expect the following hypothesis to be confirmed: Hypothesis 1: Internalization has an impact on firms' cash holdings.
iii) Moderating effect of creditor rights
Next to multinationality, creditor rights contribute in determining the corporate liquidity policy of firms because they provide the ground rules for competing interests between creditors and debtors (Djankov et al., 2007). There are different views regarding the possible impact of creditor rights on corporate cash holdings. Acharya et al. (2011) and Djankov et al. (2007) reveal that strong creditor rights reduce the creditor-debtor agency problem. In this study, we define creditor rights as an area of law that contains rights that creditors possess in terms of reclaiming the money that is owed to them from their debtors (Houston et al., 2010).
Because of the decreased agency conflict, the supply of credit increases. However, Acharya et al. (2011) contend that while stronger creditor rights increase the supply of credit, it results in firms borrowing less, pursuing less risky investment opportunities, and reducing cash flow risk. Consequently, this implies increasing cash reserves held by firms because either these firms invest less or the extra cash serves as a substitute for the decreased leverage (Acharya et al., 2011). Next to that creditor rights are used as an intervention action of creditors to reclaim their money in times of bankruptcy, creditor
3 The reduction of cost of capital is partly caused by the reduction of investors’ risk according to the
9 rights show an important role in dividend decisions as well (Brockman and Unlu, 2009). Creditors pursuit and managers confirm to pay fewer dividends when creditor rights are weak (Brockman and Unlu, 2009). Thus, creditors also use their powers in many instances where financial distress or bankruptcy is not an actual issue.
The direct relation between creditor rights and cash holdings is studied before. A recent study of Seifert and Gonenc (2016) investigate the effect of creditor rights and country governance on cash holdings using a sample of firms from 47 countries. The results prove that cash holdings are smaller when creditor rights and country governance are high. They explain this negative relation by a greater supply of funds through creditor rights due to lower interest rates and greater protection for creditors.
Contrary results are from the study of Yung and Nafar (2014) who find evidence for a positive relation between creditor rights and the level of corporate cash holdings. Additionally, the study finds that excess cash motivated by creditor rights has a significant negative impact on firm value. This finding is confirmed by Kyröläinen et al. (2013), who demonstrate that the marginal value of cash is worth less in countries with strong creditor rights. Despite the disagreement among researchers in earlier studies, we expect that creditor rights have an impact on cash holdings. However, whether this impact is positive or negative is not clear. Therefore, we hypothesize:
Hypothesis 2a: Creditor rights have an impact on firms’ cash holding.
10 debt in case of bankruptcy determines the optimal debt allocation within MNCs. In short, as MNCs operate in different countries, they are well positioned to optimally arbitrage differences in creditor protection (Noe, 2000). Eventually, determining the optimal capital structure would eventually influence the optimal level of cash to hold as well.
Further, if MNCs become financially distressed, the diversity in legal systems creates differences for parent- and foreign country creditors (Desai et al., 2004). MNCs could strategically exploit conflicts of interest between parent- and host country creditors by using the claims of one country’s creditors as a wedge to force concessions from the other country’s creditors (Desai et al., 2004). This ability to strategically negotiate across countries creates valuable capabilities for distressed MNCs when it chooses to borrow in more than one country. It decreases the precautionary motive to hold cash since MNCs experience lower bankruptcy risk.
11
iv) Moderating effect of shareholder rights
Further on, as the creditor-debtor agency problem is discussed earlier, we look at the relation between the firm and its shareholders as well. In the past, classical studies proof that management, as an agent of shareholders, and shareholders often show an agency problem due to their conflicts of interest (Jensen and Meckling, 1976). These conflicts of interest are a result of the separation between ownership and control as it gives managers incentives to misuse corporate resources (Dittmar et al., 2003). More specifically, corporate managers tend to collect cash, to increase their power by obtaining greater control of resources or to increase their private benefits (Dittmar et al., 2003). Moreover, managers aim at building the firm into an empire (Luo, 2011). When the firm grows, managers can enjoy more compensation and non-financial benefits such as prestige and power (Luo, 2011). To achieve this goal, managers are willing to use cash reserves to over-invest in projects, even if those projects show a negative net present value (Harford et al., 2008).
12 supply. With this in mind, cash holdings can ease financial constraints and allow firms to invest more effectively which increases the return of shareholders (Luo, 2011).
As part of investor protection, shareholder protection is a country mechanism, which protects shareholders’ interests and protects against expropriation by managers (Spamann, 2010). With stronger shareholder rights, managers should have strong stimulus not to overinvest as they will be held accountable for their value-decreasing behaviors (Luo, 2011).
Multiple studies examine the effect of shareholder rights on firms’ cash holdings. Huang et al. (2013) showed that shareholder protection is a significant divining factor in determining the level of cash holding. Moreover, they find a positive effect on this relation. Furthermore, this same study explains that after 1998 the relation between shareholder protection and cash holdings becomes stronger. They argue that this increased strength can be explained by the change in the managers' perception of using the cash more efficiently. Moreover, Dittmar et al. (2003) examine the determinants of cash holdings and proof that high cash levels are associated with poor country-level shareholder protection. Due to ambiguous result in previous literature, we expect the following hypothesis to be true:
Hypothesis 3a: Shareholder rights have an impact on firms’ cash holding.
13 higher agency costs relative to DCs because the geographic diversity of MNCs makes monitoring more difficult and costly. This increased complexity of MNCs leads to a greater amount of information asymmetry between managers and shareholders (Doukas and Pantzalis, 2001). As MNCs are more sensitive to information asymmetry, this enables managers to pursue their personal interests more easily. Therefore, we expect that shareholder protection influences the relation between internalization and corporate cash holdings. Therefore, we hypothesize:
Hypothesis 3b: Shareholder rights have a moderating effect on the relation between internalization and corporate cash holdings.
3. Data and methodology
3.1 Sample construction and data sources
The analysis includes 38 countries for which data on creditor rights are available. Financial firms (SIC 6000-6999) and utilities (4900-4999) are excluded because these firms have non-comparable cash holdings. We also omit observations with negative market values. We follow Fernandes and Gonenc (2016) in excluding countries with a relatively low number of observations, which is less than 50 firm-year observations in our sample. Further, previous literature on the relation between creditor rights and cash holdings did not control for the global financial crisis, which had a substantial impact on firms’ cash holdings and economies (Yung and Nafar, 2014). Therefore, in the additional analysis, we split the period into a period before (1990-2007) and after the financial crisis (2010-2017) to verify whether the results remain consistent.
14 collected from Worldscope Datastream due to the limited availability of variables in Compustat.
Data for our main country-level variables creditor- and shareholder rights are collected from La Porta et al. (1998) and Djankov et al. (2007). Other country-level variables are collected from the World Bank database. A description of each variable with sources can be found in Appendix A. The final sample, summarized in Table 1 (section 4.1), includes unbalanced panel data of 184,229 firm-year observations across 38 countries over the 1990-2017 period.
3.2 Research design and main variables
One focus of this study is to investigate the relation between internalization and the level of corporate cash holdings. Our dependent variable is cash holdings [Cash ratio]. This variable is measured by the ratio of cash and short-term investments to total assets. The short-term investments are included because these are highly liquid. This proxy is consistent with earlier studies investigating corporate cash holdings (Fernandes and Gonenc, 2016; Yung and Nafar, 2014).
15 Hence, we consider firms to be multinational when foreign operations of affiliates report either profits or losses.
Another important focus of this study is to examine the moderating effect of creditor rights on the relation between internationalization and corporate cash holding. We follow Acharya et al. (2011) in measuring the proxy for creditor rights. They use the proxy from La Porta et al. (1998) and Djankov et al. (2007) who use an aggregated variable [CRIGHTS] for creditor rights, which is the sum of four provisions: automatic stay, reorganization procedure, secured creditors, and operating management. These provisions rate the powers of secured lenders during bankruptcy. The first attribute is automatic stay [AS] and indicates whether secured creditors can claim their collateral after the petition for reorganization is approved. This is the case when there is no automatic stay or asset freeze imposed by the court. The second attribution is reorganization procedure [RP] and explains whether there are restrictions, such as creditor approval when a debtor request for reorganization. The third provision is secured creditors [SC] and indicates whether secured creditors are paid first out of the proceeds of the liquidating bankrupt firm. Finally, the fourth provision is operating management [OM] and explains whether an administrator, and not management, is responsible for operating the business during reorganization (Djankov et al., 2007). Each of these four provisions implies a dummy variable that takes the value of one if it is present in the country's bankruptcy code, or zero if it is absent. The aggregated variable CRIGHTS ranges between zero and four. A higher index value means stronger creditor rights. Further, there is considerable variation in creditor rights across countries with similar shareholder rights.
16 been updated until 2004 in the most recent paper of Djankov et al. (2007). Since our sample period is till 2017, this means that we have no data on bankruptcy reforms in the period from 2005 till 2017. However, in our sample period from 1990 till 2004 only nine of the 38 countries had changes in their creditor rights scores of which one country had two reforms. Of the nine reforms, seven lead to a decrease in creditor rights (Ireland, 1990; Canada, 1992; Finland, 1993; India, 1993; Israel, 1995; Sweden, 1995; Thailand, 1999; Japan, 2000) and two lead to an increase in creditor rights (Japan, 2002; Spain, 2004). The remaining countries in our sample experienced no bankruptcy reforms during the 1990 through 2004 period. Therefore, we assume that the level of creditor rights remains unchanged from 2004. This allows our study to extend the analysis beyond 2004 without compromising the integrity of our results since the index of creditor rights shows very little time series variation. This approach is in line with the study of Seifert and Gonenc (2016). Furthermore, Djankov et al. (2007) state that even when recognizing the reforms of creditor rights in 129 countries, creditor rights are remarkably stable over time. Over 90% of the observations of creditor rights remain identical with the classical study of La Porta et al. (1998).
17 the minimum percentage of share capital that entitles a shareholder to call for an extraordinary shareholders’ meeting is less than or equal to ten percent. A higher value indicates a country with better shareholder rights. In this study, the data is collected from La-Porta et al., (1997) for the period 1990-2002, Djankov et al., (2008) for the period 2003-2006 and Spamann, (2010) for the period 2007-2008. After 2008, we assume that the anti-director index remains stable, which enables this study to extend the time period to 2017. (For a further explanation of our variables please refer to Appendix A.)
3.3 Control variables
This study includes control variables which have proven to be determinants of cash holdings in previous literature (e.g. Dittmar and Mahrt-Smith, 2007; Opler et al., 1999; Pinkowitz et al., 2016). When following the classical study of (Opler et al., 1999), this study controls for firm size, capital expenditure, R&D intensity, cash flow, leverage and whether a firm pays a dividend.
18 liabilities divided by the book value of total assets. Next, we also include a dummy variable [Dividend] which equals the value of one if the firm pays dividend and equals zero if the firm do not pay dividend. According to Opler et al., (1999) firms that pay dividend hold lower cash balances as they are more able to raise funds when needed by cutting dividend. We also include control variables which are used in more recent studies. Harford et al. (2008) use net working capital [NWC] as a control variable. This additional control variable is measured by current assets minus cash and current liabilities divided by the book value of total assets. In our analysis, Tobin’s Q [TobinQ] is included to act as proxy for corporate investment opportunities (Kalcheva and Lins, 2007). This variable is measured as the sum of the book value of total assets and market value of equity minus the book value of equity divided by the book value of total assets. Also, debt issuance [Netdebtissue] and equity issuance [Netequityissue] are tight related with the financing constraints of the company. Firms with debt and equity issuance tend to hold more cash (Fernandes and Gonenc, 2016). Therefore, these control variables are included. The measurement of both variables is presented in Appendix A. Finally, asset tangibility [Tangibility] is measured by the ratio of plant, property and equipment divided by the book value of total assets and is also used by Fernandes and Gonenc (2016). A higher percentage of asset tangibility implies a higher collateral and this decreases the need to hold substantial cash (Vig, 2013).
19 reason, we also include the country’s annual GDP growth in percentage [GDPgrowth] to control for changes in GDP. Finally, we follow a number of studies with a broad measure of country governance based on data from the World Bank (e.g. Brockman and Unlu, 2009; Kyröläinen et al., 2013). This measure includes a general measure of the country governance score, which we compute as the average score of the six dimensions of governance [WGIndex] from the Worldwide Governance Indicators dataset (Kaufmann and Mastruzzi, 2006). These six indicators of broad dimensions of governance consist of: (1) voice and accountability; (2) political stability and absence of violence/terrorism; (3) government effectiveness; (4) regulatory quality; (5) rule of law; and (6) control of corruption. Higher values in these dimensions indicate better governance.
3.4 Robustness check
We examine robustness checks to test whether results are consistent. For our dependent variable, this study uses an alternative measurement of cash holding. We follow Seifert and Gonenc (2016) and Yung and Nafar (2014) with using an alternative proxy for cash holdings [Net cash ratio] that is measured as the amount of cash and short-term investments scaled by the book value of total assets minus cash- and short-short-term investments.
Further, we use an alternative measure for our main independent variable to calculate multinationality. We calculte the new proxy by use of the ratio of foreign assets to total assets [Foreignassets] to verify if our results are consistent. With this proxy, we follow Fernandes and Gonenc (2016) who also use this variable as rubustness check. 3.5 Empirical model
20 control variables which have showed a relation with cash holdings in previous literature (see section 3.3 for further explanations). As macroeconomic conditions may affect cash holdings, we include fixed effects (Duchin et al., 2010). Specifically, we include firm- and year fixed effects to control for within group variation over time and within entities.
To test the first hypothesis, whether internationalization has an impact on corporate cash holdings, the following regression specification by ordinary least squares (OLS) is used: 𝐶𝑎𝑠ℎ 𝑟𝑎𝑡𝑖𝑜𝑖𝑡 = 𝛽0+ 𝛽1𝑀𝑢𝑙𝑡𝑖𝑛𝑎𝑡𝑖𝑜𝑛𝑎𝑙𝑖𝑡+ 𝛽2𝑁𝑊𝐶𝑖𝑡+ 𝛽3𝐶𝑎𝑠ℎ𝑓𝑙𝑜𝑤𝑖𝑡 + 𝛽4𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖𝑡+ 𝛽5Capex𝑖𝑡+ 𝛽6𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑖𝑡+ 𝛽7𝑅&𝐷𝑖𝑡 + 𝛽8𝑇𝑜𝑏𝑖𝑛𝑄𝑖𝑡+ 𝛽9𝐹𝑖𝑟𝑚𝑠𝑖𝑧𝑒𝑖𝑡+ 𝛽10𝑁𝑒𝑡𝑑𝑒𝑏𝑡𝑖𝑠𝑠𝑢𝑒𝑖𝑡 + 𝛽11𝑁𝑒𝑡𝑒𝑞𝑢𝑖𝑡𝑦𝑖𝑠𝑠𝑢𝑒𝑖𝑡+ 𝛽12𝑇𝑎𝑛𝑔𝑖𝑏𝑖𝑙𝑖𝑡𝑦𝑖𝑡+ 𝛽13𝐿𝑜𝑔(𝐺𝐷𝑃)𝑗𝑡 + 𝛽14𝐺𝐷𝑃𝑔𝑟𝑜𝑤𝑡ℎ𝑗𝑡+ 𝛽14𝑊𝐺𝐼𝑛𝑑𝑒𝑥𝑗𝑡+ 𝑓𝑖𝑡 + 𝜀𝑗𝑖𝑡 (1)
The dependent variable 𝐶𝑎𝑠ℎ 𝑟𝑎𝑡𝑖𝑜𝑖𝑡 is of firm 𝑖 over annual time period 𝑡.
𝑀𝑢𝑙𝑡𝑖𝑛𝑎𝑡𝑖𝑜𝑛𝑎𝑙𝑖𝑡 is the dummy whether a firm is multinational in firm 𝑖 over annual time
period 𝑡. The firm-specific control variables are net working capital (𝑁𝑊𝐶𝑖𝑡), cash flow
(𝐶𝑎𝑠ℎ𝑓𝑙𝑜𝑤𝑖𝑡), leverage (𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖𝑡), capital expenditure (Capex𝑖𝑡), dividend payout (𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑖𝑡), research and development intensity (𝑅&𝐷𝑖𝑡), Tobin’s Q (𝑇𝑜𝑏𝑖𝑛𝑄𝑖𝑡), firm’s
size (𝐹𝑖𝑟𝑚𝑠𝑖𝑧𝑒𝑖𝑡), net debt issuance (𝑁𝑒𝑡𝑑𝑒𝑏𝑡𝑖𝑠𝑠𝑢𝑒𝑖𝑡) and net equity issuance
(𝑁𝑒𝑡𝑒𝑞𝑢𝑖𝑡𝑦𝑖𝑠𝑠𝑢𝑒𝑖𝑡) and are of firm 𝑖 over annual time period 𝑡. Furthermore,
country-level control variables are the natural logarithm of GDP in USD (𝐿𝑜𝑔(𝐺𝐷𝑃)𝑗𝑡), annual
growth of GDP in percentage (𝐺𝐷𝑃𝑔𝑟𝑜𝑤𝑡ℎ𝑗𝑡), and World Governance index (𝑊𝐺𝐼𝑛𝑑𝑒𝑥𝑗𝑡)
21 To test whether creditor rights have an impact on cash holdings (hypothesis 2a) and whether creditor rights has a moderating effect on the relation between multinationality and cash holdings (hypothesis 2b), we use the following equation:
𝐶𝑎𝑠ℎ 𝑟𝑎𝑡𝑖𝑜𝑖𝑡 = 𝛽0+ 𝛽1𝑀𝑢𝑙𝑡𝑖𝑛𝑎𝑡𝑖𝑜𝑛𝑎𝑙𝑖𝑡+ 𝛽2𝐶𝑅𝐼𝐺𝐻𝑇𝑆𝑗𝑡 + 𝛽3𝑀𝑢𝑙𝑡𝑖𝑛𝑎𝑡𝑖𝑜𝑛𝑎𝑙𝑖𝑡 𝑥 𝐶𝑅𝐼𝐺𝐻𝑇𝑆𝑗𝑡+ 𝛽4𝑁𝑊𝐶𝑖𝑡+ 𝛽5𝐶𝑎𝑠ℎ𝑓𝑙𝑜𝑤𝑖𝑡 + 𝛽6𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖𝑡+ 𝛽7Capex𝑖𝑡+ 𝛽8𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑖𝑡+ 𝛽9𝑅&𝐷𝑖𝑡 + 𝛽10𝑇𝑜𝑏𝑖𝑛𝑄𝑖𝑡 + 𝛽11𝐹𝑖𝑟𝑚𝑠𝑖𝑧𝑒𝑖𝑡+ 𝛽12𝑁𝑒𝑡𝑑𝑒𝑏𝑡𝑖𝑠𝑠𝑢𝑒𝑖𝑡 + 𝛽13𝑁𝑒𝑡𝑒𝑞𝑢𝑖𝑡𝑦𝑖𝑠𝑠𝑢𝑒𝑖𝑡+ 𝛽14𝑇𝑎𝑛𝑔𝑖𝑏𝑖𝑙𝑖𝑡𝑦𝑖𝑡+ 𝛽15𝐿𝑜𝑔(𝐺𝐷𝑃)𝑗𝑡 + 𝛽16𝐺𝐷𝑃𝑔𝑟𝑜𝑤𝑡ℎ𝑗𝑡+ 𝛽17𝑊𝐺𝐼𝑛𝑑𝑒𝑥𝑗𝑡+ 𝑓𝑖𝑡+ 𝜀𝑗𝑖𝑡 (2)
We add 𝐶𝑅𝐼𝐺𝐻𝑇𝑆𝑗𝑡 which refers to the creditor rights of country 𝑗 over annual time
period 𝑡. Further, we add the interaction term 𝑀𝑢𝑙𝑡𝑖𝑛𝑎𝑡𝑖𝑜𝑛𝑎𝑙𝑖𝑡 𝑥 𝐶𝑅𝐼𝐺𝐻𝑇𝑆𝑗𝑡 to account
for the interaction between these variables. Also, identical firm- and country level control variables from equation (1) are included. In addition, year- and firm fixed effects (𝑓𝑖𝑡) are inserted to capture omitted variables correlated with cash holdings. Finally, both regressions contain robust clustered standard errors at the firm level as well. To test
hypothesis 2a, we run a separate regression by only including 𝐶𝑅𝐼𝐺𝐻𝑇𝑆𝑗𝑡 to test the effect
of creditor rights on corporate cash holdings. Next, we run a different regression by adding the interaction term 𝑀𝑢𝑙𝑡𝑖𝑛𝑎𝑡𝑖𝑜𝑛𝑎𝑙𝑖𝑡 𝑥 𝐶𝑅𝐼𝐺𝐻𝑇𝑆𝑗𝑡 to test the moderating effect of creditor rights on the relation between multinationality and cash holdings (hypothesis 2b).
To test the direct effect of shareholder rights on cash holdings (hypothesis 3a) and to test the moderating effect of shareholder rights on the relation of multinationality and cash holdings (hypothesis 3b), we include a third equation.
22 We replace 𝐶𝑅𝐼𝐺𝐻𝑇𝑆𝑗𝑡 into 𝑆𝑅𝐼𝐺𝐻𝑇𝑆𝑗𝑡 where 𝑆𝑅𝐼𝐺𝐻𝑇𝑆𝑗𝑡 refers to shareholder rights at country 𝑗 over annual time period 𝑡. Next, we add the interaction term of
𝑀𝑢𝑙𝑡𝑖𝑛𝑎𝑡𝑖𝑜𝑛𝑎𝑙𝑖𝑡 𝑥 𝑆𝑅𝐼𝐺𝐻𝑇𝑆𝑗𝑡 to account for the interaction between these variables. Also
in this equation, All identical firm- and country level control variables from equation (1) are included. Also, year- and firm fixed effects (𝑓𝑖𝑡) are inserted to capture omitted variables correlated with cash holdings. In addition, both regressions contain robust clustered standard errors at the firm level as well. To test hypothesis 3a, we run a
regression by only including 𝐶𝑅𝐼𝐺𝐻𝑇𝑆𝑗𝑡 to test the effect of creditor rights on corporate
cash holdings. Next, we run a different regression by adding the interaction term 𝑀𝑢𝑙𝑡𝑖𝑛𝑎𝑡𝑖𝑜𝑛𝑎𝑙𝑖𝑡 𝑥 𝐶𝑅𝐼𝐺𝐻𝑇𝑆𝑗𝑡 to test the moderating effect of creditor rights on the relation between multinationality and cash holdings (hypothesis 3b).
All variables, except for 𝐶𝑎𝑠ℎ𝑓𝑙𝑜𝑤, 𝑁𝑊𝐶, 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑, 𝐶𝑅𝐼𝐺𝐻𝑇𝑆, 𝑆𝑅𝐼𝐺𝐻𝑇𝑆, 𝐿𝑜𝑔(𝐺𝐷𝑃),
23
4. Empirical results
4.1 Descriptive statistics
Table 1 displays the summary statistics of the variables used in our analysis. When observing our main variables, we recognize that these statistics are in line with previous literature on the relation between internalization and cash holdings. To give an example, Fernandes and Gonenc (2016) present a mean value of 0.1642 for cash ratio. Our mean for Cash ratio is 0.1956 is a bit higher, but in line with their research. Besides, Fernandes and Gonenc (2016) show a median of 0.0918 for cash ratio and is consistent with our median of 0.1048. Further, the mean of the dummy variable Multinational is 0.2578 in our study, which is comparable with 0.2854 found by Fernandes and Gonenc (2016).
Besides the consistent statistics, we also recognize some differences with other studies. Fernandes and Gonenc (2016) found a mean for firm size of 12.0265 in their sample. Our mean for firm size (Firmsize) shows a substantially lower value of 4.5886. This might indicate that in our study many firms are less big in terms of assets. Furthermore, we note that the standard deviation for the variable Cash ratio is quite high (0.2321) which indicates that there is a large variation in our sample. The variation is large for the variable Net cash ratio (0.5142) as well. This is also visible for the minimum and maximum values for both Cash ratio and Net cash ratio.
24 (3.6041) and median (3.0000) are quite high which indicates that many countries score high on shareholder protection.
Further on, we present a different number of observations (63,826) for the variable Foreign assets. This is caused by missing firm-year data for the United States and Canada in our sample. However, since the number of observations for foreign assets is substantial, we still use this variable as replacement for the dummy variable Multinational as robustness check.
Table 2 illustrates the summary statistic of the main variables per year. We observe an increase of the average cash holding of 77%, from 0.1257 in 1990 to 0.2236 in 2017 (also, see Appendix B.). This upward trend is in line with the findings of Pinkowitz et al. (2012) who find an upward trend of cash holdings from 1990 till 2010.
Finally, table 3 displays summary statistics of the main variables per country. We observe that the United States has the most observations with 51% of the total sample, followed by Canada with 13%. Europe’s countries: Austria, Belgium, Germany, Denmark, Spain, Finland, France, United Kingdom, Greece, Ireland, Italy, Netherlands, Portugal and Sweden count for 11.33% of the total sample. Israel and the United States present the highest mean for the variable cash ratio with 0.3395 and 0.2311 respectively. Dittmar et al. (2003) who find above standard cash holdings in Israel as well. Bates et al. (2009) explain the high cash holdings of U.S. firms by the general large research and development expenses.
25
Table 1.
Overall descriptive statistics
The table presents the summary statistics for the sample used in this study. The data set exist of 184,229 firm-year observations from 19,461 unique firms in 38 countries covering the period from 1990 to 2017. All variables, excluding net working capital, cash flow, CRIGHTS, SRIGHTS, log(GDP), GDP growth and world governance index are winsorized at 1% level in both tails. The variables net working capital and cash flow are winsorized at 5% level in both tails. This table presents the number of observations (N), the mean (Mean), the median (Median), standard deviation (Std. dev.), minimum (Min) and maximum (Max) for the variables used in the analysis. NWC, Cashflow, Leverage, Capex, Dividend, R&D, TobinQ, Firmsize, Netdebtissue, Netequityissue and Tangibility represent the firm-level control variables. Log(GDP), GDPgrowth and WGIndex stand for the country-level control variables. Dependent variable: Cash ratio, Net cash ratio (robustness). Independent variables of interest: Multinational, Foreign assets (robustness), CRIGHTS, SRIGHTS. Definitions and sources of each variable can be found in Appendix A.
Panel A. Overal sample
Variable N Mean Median Std. dev. Min Max
Cash ratio 184,229 0.1956 0.1048 0.2321 0.0000 0.9951
CRIGHTS 184,229 1.5223 1.0000 0.9407 0.0000 4.0000
SRIGHTS 184,229 3.6041 3.0000 0.7617 2.0000 5.0000
Multinational 184,229 0.2578 0.0000 0.4374 0.0000 1.0000
Foreign assets 63,826 0.0995 0.0000 0.1929 0.0000 0.8660
Net cash ratio 184,229 0.3620 0.2017 0.5142 0.0000 4.8810
Firm-level control variables
NWC 184,229 0.0088 0.0334 0.3059 -1.7999 0.4981 Cashflow 184,229 -0.0384 0.0516 0.2368 -0.8642 0.1772 Leverage 184,229 0.5104 0.5064 0.2722 0.0033 1.0000 Capex 184,229 0.0544 0.0307 0.0744 0.0000 0.4991 Dividend 184,229 0.4328 0.0000 0.4955 0.0000 1.0000 R&D 184,229 0.0483 0.0000 0.1225 0.0000 0.8639 TobinQ 184,229 2.3558 1.3693 2.7703 0.5500 20.5579 Firmsize 184,229 4.5886 4.8149 2.8998 0.0000 11.3947 Netdebtissue 184,229 0.0145 0.0000 0.1037 -0.3488 0.9025 Netequityissue 184,229 0.0855 0.0000 0.2558 -0.1536 1.7136 Tangibility 184,229 0.2990 0.2299 0.2587 0.0000 0.9794
Country-level control variables
Log(GDP) 184,229 29.0280 29.8381 1.4828 23.2120 30.6007
GDPgrowth 184,229 2.4247 2.4560 2.1849 -13.1267 25.1173
26
This table displays in column 2,3 and 4 the number of firm-year observations (N Firm-year), percentage of firm-year observations (%) and number of unique firms (N Firms). Column 5 and 6 present the median values (Median) of the variables CRIGHTS and SRIGHTS. Column 7 and 8 shows the mean values (Mean) of variables Multinational and Cash ratio. Cash ratio is the dependent variable in this study. The independent variables of interest are a dummy variable for being multinational (Multinational), country’s creditor rights (CRIGHTS) and the shareholder rights in a country (SRIGHTS). Furthermore, sources and calculations of the variables can be found in Appendix A.
CRIGHTS SRIGHTS Multinational Cash ratio
Year Nr. firm-year % Nr. firms Median Median Mean Mean
27
The table displays country summary statistics of the main variables used in the regressions. Column 2 shows the total number of observation per country (Nr. Firm-year). Column 3 shows the percentage of the firm-year observations in a country (%). Column 4 presents the number of unique firms in a country (Nr. Firms). Column 5, 6, 7 and 8 present the dummy value for the four provisions of creditor rights in each country separately. Column 9 presents the total sum of the four provisions, resulting in the total score of creditor rights in a country (Total). Column 10 presents the country’s score of shareholders rights and ranges between zero and five (Total). Column 11, 12 and 13 present the mean (Mean), median (Median) and standard deviation (Std. dev.) respectively of the dummy variable Multinational. Column 14-16 display the mean (Mean), median (Median) and standard deviation (Std. dev.) respectively of the variable Cash ratio. Definitions and sources of the variables can be found in Table 1, Appendix A.
CRIGHTS SRIGHTS Multinational Cash ratio
Country Firm-year Nr. % Firms Nr. (1) RP (2) AS (3) SC OM (4) CRIGHTS (Total) Total Mean Median Std. dev. Mean Median Std. dev.
28
Table 3.
(Continued)
CRIGHTS SRIGHTS Multinational Cash ratio
Country Firm-year Nr. % Firms Nr. (1) RP (2) AS (3) SC OM (4) CRIGHTS (Total) Total Mean Median Std. dev. Mean Median Std. dev.
29 We start our regression analysis by exploring the relation between internalization and cash holdings. Table 4 shows the results of our baseline regression obtained by year- and firm fixed-effects pooled time-series cross-sectional regressions of the cash ratio. Equation 1 corresponds to this table and is presented in section 3.5. First, we investigate whether firm-specific control variables in our analysis show consistent results with previous research on the determinants of cash holdings (Amess et al., 2015; Duchin, 2010; Fernandes and Gonenc, 2016; Pinkowitz and Williamson, 2016).
30 In model 2, we include more firm-specific control variables to follow more recent studies (Fernandes and Gonenc, 2016; Harford et al., 2008). All variables show significant impact on cash holdings except for NWC. NWC becomes insignificant which indicate that cash holdings are not affected by NWC when controlling for more cash holding determinants.
Further, model 3 presents all firm- and country level variables together. Log (GDP) and WGIndex both have significant positive coefficients, suggesting that better governed countries with higher score on the world governance index motivate firms to hold higher cash balances. GDPgrowth reports a significant negative impact on cash holdings at the one percent level. This result is consistent with the results of Yung and Nafar (2014) who also found a significant negative impact of economic growth, measured by GDPgrowth, on cash holdings. Duchin (2010) states that firms hold more cash following a potential financial crisis.
31
Table 4.
Regression results | Multinationals and cash holdings
This table shows results from the pooled fixed-effect OLS regression analysis for the full sample in the period 1990-2017. The dependent variable is Cash ratio and is measured by cash and short term investments to the book value of total assets. The variable Multinational is the dependent variable of interest and is set to zero if a value was missing. Capex is a ratio measured by the capital expenses divided to the book value of total assets and when a vale was missing, it is set to zero. This same procedure is adjusted for the variable R&D, measured by the research and development expenses to the book value of total assets. Further sources and definitions of the variables are presented in Appendix A. Year- and firm fixed effects are used in all regressions. Robust clustered standard errors at the firm level are presented within the brackets. The symbols ***, **, * indicate statistical significance at the 1%, 5% and 10% levels, respectively.
Dependent variable: Cash ratio
1 2 3 4 5 Multinational -0.008*** [0.002] -0.008*** [0.002] NWC -0.016*** [0.005] [0.005] -0.002 [0.005] -0.001 [0.005] -0.001 [0.005] -0.001 Cashflow -0.086*** [0.005] -0.042*** [0.005] -0.042*** [0.005] -0.041*** [0.005] -0.041*** [0.005] Leverage -0.185*** [0.006] -0.158*** [0.005] -0.158*** [0.006] -0.157*** [0.005] -0.158*** [0.006] Capex -0.208*** [0.011] -0.050*** [0.008] -0.049*** [0.009] -0.050*** [0.008] -0.049*** [0.009] Firmsize -0.004*** [0.000] -0.002*** [0.000] -0.002*** [0.000] -0.002*** [0.000] -0.002*** [0.000] R&D -0.045*** [0.014] -0.049*** [0.013] -0.048*** [0.013] -0.049*** [0.013] 0.049*** [0.013] TobinQ 0.010*** [0.000] 0.011*** [0.000] 0.010*** [0.000] 0.011*** [0.000] Dividend -0.005*** [0.001] -0.004*** [0.001] -0.005*** [0.001] -0.004*** [0.001] Netdebtissue 0.025*** [0.006] 0.026*** [0.006] 0.025*** [0.006] 0.026*** [0.006] Netequityissue 0.107*** [0.004] 0.106*** [0.004] 0.107*** [0.004] 0.106*** [0.004] Tangibility -0.385*** [0.007] -0.391*** [0.007] -0.385*** [0.007] -0.391*** [0.007] Log(GDP) [0.004] 0.008* [0.004] 0.007* GDPgrowth -0.001*** [0.000] -0.001*** [0.000] WGIndex 0.009*** [0.002] 0.009*** [0.002] Constant 0.312*** [0.005] 0.312*** [0.005] [0.120] 0.146 0.392*** [0.006] [0.120] 0.167 Adjusted R-squared 0.224 0.224 0.226 0.224 0.227 Nr. of firms 19,461 19,461 19,461 19,461 19,461 Nr. of observations 184,229 184,229 184,229 184,229 184,229 Fixed effects
Year Yes Yes Yes Yes Yes
32
4.3 Moderating effect of creditor- and shareholder rights
Now, we analyze whether cash holdings is affected by country’s creditor- or shareholder rights. In addition, we investigate whether this relation is different between MNCs and DCs.
First, model 1 in Table 5 displays the effect of the basis relation between creditor rights and cash holdings. When controlling for all firm- and country level characteristics, CRIGHTS has a positive and significant impact on cash holdings. This finding is in line with the results from Yung and Nafar (2014) who report that stronger creditor rights are associated with higher levels of corporate cash holdings. The authors state that investors are concerned about the motives of holding cash when creditor rights are strong. Strong creditor rights impose significant private costs on managers, who might protect their personal interests under this pressure (Yung and Nafar, 2014).
Acharya et al. (2011) present a positive correlation between corporate cash holdings and creditor rights as they find that firms borrow less when creditor rights become stronger. Our finding is not consistent with the study of Seifert and Gonenc (2016) who find a negative and significant effect of creditor rights on cash holdings. This study argues that strong creditor rights elicit a greater supply of funds due to lower interest rates and greater protection for creditors. Our findings on the relation of creditor rights and cash holdings hold when including the dummy for multinationals in model 2. In sum, we find enough evidence to support hypothesis 2a. Specifically, we can infer that creditor rights have an impact on corporate cash holdings. Moreover, this impact results in a positive relation.
33 being multinational and cash holdings. Therefore, we reject hypothesis 2b as we cannot prove that the effect of creditor rights is different for MNCS in contrast to domestic DCs.
Model 4 includes the findings for the relation between shareholder rights on cash holdings. SRIGHTS is negative and highly significant at the one percent level. This indicates that in countries with higher shareholder rights, firms tend to have lower cash holdings. This is in line with the study of Dittmar et al. (2003) who find that shareholder rights are important in determining corporate cash holdings throughout the world. More specifically, they find a negative effect of shareholder rights on cash holdings. Shareholders in countries with strong shareholder protection have stronger power in preventing managers misusing excess cash in firms (Dittmar et al., 2003). The significance and sign of SRIGHTS hold when including the variable Multinational in model 5. With these findings, we confirm hypothesis 3a. We have enough evidence to infer that shareholder rights have an impact on corporate cash holdings. More specifically, this relation turns out to be negative.
Model 6 provides the results for the inclusion of an interaction between SRIGHTS and the dummy Multinational. The outcome is positive but insignificant. Therefore, we cannot infer that the effect of shareholder rights is different for MNCs relative to DCs. Specifically, we reject hypothesis 3b.
4.4 Robustness check
4.4.1 Alternative measurements
34
Table 5.
Regression results | Moderating effect of creditor- and shareholder rights
The table displays the pooled fixed-effect OLS regressions to estimate the effect of creditor- and shareholder rights on the relation between multinationality and cash holdings. The dependent variable is Cash ratio and is measured by cash and short term investments to the book value of total assets. Further definitions and sources of the variables can be found in Appendix A. For R&D and Capex, we set the value to zero if data was missing. Year- and firm fixed effects are used in all regressions. Robust clustered standard errors at the firm level are presented within the brackets. The symbols ***, **, * indicate statistical significance at the 1%, 5% and 10% levels, respectively.
Dependent variable: Cash ratio
1 2 3 4 5 6 Multinational -0.008*** [0.002] -0.005* [0.003] -0.008*** [0.002] -0.010** [0.005] CRIGHTS 0.042** [.020] 0.042** [0.020] 0.042** [0.020] SRIGHTS -0.005*** [0.002] -0.005*** [0.002] -0.005*** [0.002] Multinational x CRIGHTS -0.002 [0.002] Multinational x SRIGHTS 0.001 [0.001] NWC -0.001 [0.005] [0.005] -0.001 [0.005] -0.001 [0.005] -0.001 [0.005] -0.001 [0.005] -0.001 Cashflow -0.042*** [0.005] -0.041*** [0.005] -0.041*** [0.005] -0.042*** [0.005] -0.041*** [0.005] -0.041*** [0.005] Leverage -0.158*** [0.006] -0.158*** [0.006] -0.158*** [0.006] -0.158*** [0.006] -0.157*** [0.006] -0.157*** [0.006] Capex -0.049*** [0.009] -0.049*** [0.009] -0.049*** [0.009] -0.049*** [0.009] -0.049*** [0.009] -0.049*** [0.009] Dividend -0.004*** [0.001] -0.004*** [0.001] -0.004*** [0.001] -0.004*** [0.001] -0.004*** [0.001] -0.004*** [0.001] R&D -0.048*** [0.013] -0.048*** [0.013] -0.048*** [0.013] -0.048*** [0.013] -0.048*** [0.013] -0.048*** [0.013] TobinQ 0.011*** [0.000] 0.011*** [0.000] 0.011*** [0.000] 0.011*** [0.000] 0.011*** [0.000] 0.011*** [0.000] Firmsize -0.002*** [0.000] -0.002*** [0.000] -0.002*** [0.000] -0.002*** [0.000] -0.002*** [0.000] -0.002*** [0.000] Netdebtissue 0.026*** [0.006] 0.026*** [0.006] 0.026*** [0.006] 0.026*** [0.006] 0.025*** [0.006] 0.025*** [0.006] Netequityissue 0.106*** [0.004] 0.106*** [0.004] 0.106*** [0.004] 0.106*** [0.004] 0.106*** [0.004] 0.106*** [0.004] Tangibility -0.391*** [0.007] -0.391*** [0.007] -0.391*** [0.007] -0.391*** [0.007] -0.391*** [0.007] -0.391*** [0.007] Log(GDP) 0.008* [0.004] [0.004] 0.007* [0.004] 0.007* 0.008** [0.004] [0.004] 0.008* [0.004] 0.008* GDPgrowth -0.001*** [0.000] -0.001*** [0.000] -0.001*** [0.000] -0.001*** [0.000] -0.001*** [0.000] -0.001*** [0.000] WGIndex 0.009*** [0.002] 0.009*** [0.002] 0.009*** [0.002] 0.008*** [0.002] 0.008*** [0.002] 0.008*** [0.002] Constant 0.083 [0.126] [0.125] 0.105 [0.125] 0.102 [0.120] 0.141 [0.126] 0.101 [0.120] 0.162 Adjusted R-squared 0.226 0.227 0.227 0.227 0.227 0.227 Nr. of firms 19,461 19,461 19,461 19,461 19,461 19,461 Nr. of observations 184,229 184,229 184,229 184,229 184,229 184,229 Fixed effects
Year Yes Yes Yes Yes Yes Yes
35 investments divided by the book value of total assets minus cash and short-term investments. With this proxy we follow Yung and Nafar (2014) who use similar measurement for cash holdings. Moreover, Seifert and Gonenc (2016) use the same measure as replacement for cash ratio. Further, we include the same control variables as in Table 4 and Table 5.
Table 6 presents the results of the first robustness check. All results are in line with the basis regressions in Table 4 and 5 in terms of significance and sign, except for model 3. The interaction term of Multinational and CRIGHTS changes in sign but is still insignificant. Therefore, this result will not change our interpretation of hypothesis 2b. Overall, the results remain unchanged.
Further, Table 7 shows the second robustness check. Here, we use Foreign assets as an alternative measure for the level of multinationality. The foreign assets ratio is measured by foreign assets scaled by the book value of total assets. Since we only obtained data on non- U.S. and Canada countries to calculate this measure, our observations for this robustness test dropped substantially. The results remain unchanged except for model 4. Here, SRIGHTS turns insignificant which is different from the results in Table 5. The changed results might be caused by the decline in observations. Overall, the findings in Table 6 and Table 7 show similar results which indicates that these findings are robust.
4.4.2 Distributed lag at 𝑡 − 1
36
Table 6.
Robustness results | Dependent variable: Net cash ratio
The table displays the pooled fixed-effect OLS regressions to estimate the effect of creditor- and shareholder rights on the relation between multinationality and cash holdings in the period 1990-2017. The dependent variable is net Cash ratio and is measured by cash and short term investments scaled by the book value of total assets minus cash and short-term investments. For R&D and Capex, we set the value to zero if data was missing. Further definitions and sources of country- and firm level variables can be found in Appendix A. Year- and firm fixed effects are used in all regressions. Robust clustered standard errors at the firm level are presented within the brackets. The symbols ***, **, * indicate statistical significance at the 1%, 5% and 10% levels, respectively.
Dependent variable: Net cash ratio
1 2 3 4 5 Multinational -0.037*** [0.005] -0.037*** [0.005] -0.040*** [0.010] -0.037*** [0.005] -0.048*** [0.014] CRIGHTS 0.102* [0.058] [0.058] 0.101* SRIGHTS -0.016*** [0.004] -0.017*** [0.005] Multinational x CRIGHTS 0.002 [0.005] Multinational x SRIGHTS 0.003 [0.004] NWC 0.039** [0.016] 0.039** [0.016] 0.039** [0.016] 0.039** [0.016] 0.039** [0.016] Cashflow -0.127*** [0.015] -0.127*** [0.015] -0.127*** [0.015] -0.126*** [0.015] -0.127*** [0.015] Leverage -0.510*** [0.018] -0.510*** [0.018] -0.510*** [0.018] -0.509*** [0.018] -0.510*** [0.018] Capex -0.331*** [0.027] -0.331*** [0.027] -0.331*** [0.027] -0.331*** [0.027] -0.332*** [0.027] Dividend -0.016*** [0.005] -0.016*** [0.005] -0.016*** [0.005] -0.016*** [0.005] -0.016*** [0.005] R&D -0.191*** [0.044] -0.191*** [0.044] -0.191*** [0.044] -0.191*** [0.044] -0.191*** [0.044] TobinQ 0.020*** [0.001] 0.020*** [0.001] 0.020*** [0.001] 0.020*** [0.001] 0.020*** [0.001] Firmsize -0.007*** [0.001] -0.007*** [0.001] -0.008*** [0.001] -0.008*** [0.001] -0.008*** [0.001] Netdebtissue 0.120*** [0.018] 0.120*** [0.018] 0.120*** [0.018] 0.120*** [0.018] 0.120*** [0.018] Netequityissue 0.355*** [0.012] 0.355*** [0.012] 0.355*** [0.012] 0.355*** [0.012] 0.355*** [0.012] Tangibility -1.124*** [0.024] -1.124*** [0.024] -1.124*** [0.024] -1.125*** [0.024] -1.124*** [0.024] Log(GDP) 0.017 [0.012] [0.012] 0.017 [0.012] 0.016 [0.012] 0.016 [0.012] 0.019 GDPgrowth -0.002*** [0.001] -0.002*** [0.001] -0.002*** [0.001] -0.002*** [0.001] -0.002*** [0.001] WGIndex 0.025*** [0.007] 0.025*** [0.007] 0.025*** [0.007] 0.025*** [0.007] 0.020*** [0.007] Constant 0.566* [0.343] [0.360] 0.415 [0.361] 0.420 [0.344] 0.549 [0.344] 0.548 Adjusted R-squared 0.199 0.199 0.199 0.199 0.199 Nr. of firms 19,461 19,461 19,461 19,461 19,461 Nr. of observations 184,229 184,229 184,229 184,229 184,229 Fixed effects
Year Yes Yes Yes Yes Yes
37
Table 7.
Robustness results | Independent variable: Foreign assets ratio
The table displays the pooled fixed-effect OLS regressions to estimate the effect of creditor- and shareholder rights on the relation between multinationality and cash holdings. The dependent variable is Cash ratio and is measured by cash and short term investments to the book value of total assets. Foreign assets ratio is a proxy for the degree of internalization. Further definitions and sources of the variables can be found in Appendix A. Year- and firm fixed effects are used in all regressions. Robust clustered standard errors at the firm level are presented within the brackets. The symbols ***, **, * indicate statistical significance at the 1%, 5% and 10% levels, respectively.
Dependent variable: Cash ratio
1 2 3 4 5 Foreign assets -0.043*** [0.001] -0.043*** [0.005] -0.042*** [0.005] -0.043*** [0.005] -0.042*** [0.005] CRIGHTS 0.047** [0.021] 0.047** [0.021] SRIGHTS -0.000 [0.002] [0.002] -0.000
Foreign assets x CRIGHTS -0.001
[0.001]
Foreign assets x SRIGHTS -.000
[.001] NWC -0.003 [0.010] [0.010] -0.003 [0.010] -0.003 [0.010] -0.003 [0.010] -0.003 Cashflow -0.014 [0.012] [0.012] -0.014 [0.012] -0.013 [0.012] -0.014 [0.012] -0.013 Firmleverage -0.144*** [0.011] -0.144*** [0.011] -0.144*** [0.011] -0.144*** [0.011] -0.144*** [0.011] Capex -0.060*** [0.017] -0.060*** [0.017] -0.060*** [0.017] -0.060*** [0.017] -0.060*** [0.017] Dividend -0.000 [0.002] [0.002] -0.000 [0.002] -0.000 [0.002] -0.000 [0.002] -0.000 R&D -0.067 [0.065] [0.065] -0.067 [0.065] -0.067 [0.065] -0.067 [0.065] -0.067 TobinQ 0.008*** [0.001] 0.008*** [0.001] 0.008*** [0.001] 0.008*** [0.001] 0.008*** [0.001] Firmsize -0.002*** [0.001] -0.002*** [0.001] -0.002*** [0.001] -0.002*** [0.001] -0.002*** [0.001] Netdebtissue 0.052* [0.029] [0.029] 0.052* [0.029] 0.051* [0.029] 0.052* [0.029] 0.051* Netequityissue 0.126*** [0.016] 0.126*** [0.016] 0.126*** [0.016] 0.126*** [0.016] 0.126*** [0.016] Tangibility -0.242*** [0.012] -0.242*** [0.012] -0.242*** [0.012] -0.242*** [0.012] -0.242*** [0.012] Log(GDP) 0.008* [0.004] [0.004] 0.008* [0.004] 0.008* [0.004] 0.008* [0.004] 0.008* GDPgrowth 0.000 [0.000] [0.000] 0.000 [0.000] 0.000 [0.000] 0.000 [0.000] 0.000 WGIndex 0.006** [0.002] 0.006** [0.002] 0.006** [0.002] 0.006** [0.002] 0.006** [0.002] Constant 0.050 [0.120] [0.134] -0.065 [0.134] -0.061 [0.123] 0.045 [0.123] 0.052 Adjusted R-squared 0.156 0.156 0.156 0.156 0.156 Nr. of firms 4,292 4,292 4,292 4,292 4,292 Nr. of observations 63,826 63,826 63,826 63,826 63,826 Fixed effects
Year Yes Yes Yes Yes Yes
38 or deficits flow to or from lenders of shareholders. The cash flow identity issue occurs as ending cash balances will be a direct function of cash outflow variables such as dividend payments and capital expenditures over the years’ time. We address this possibility by lagging all independent variables financial data by one year. Thereafter, we re-estimate our basis regressions. Due to this lagging approach, we lose 21,882 firm year observations. Our results consistent in significance and sign.
Table 8 shows results of the distributed lag approach. We observe that the findings of our basis regressions in Tables 4 and 5 do not differ, except for the interaction term with Multinational and SRIGHTS in model 5. The interaction term becomes positive and marginally significant at the ten percent level. Since only the model of this robustness check delivers a marginally significant result for the interaction term, it is from an economic perspective, not interpretable. Hence, the results remain unchanged in sign and significance.
The fit of the distributed lag model is slightly lower than the base model. However, the firm- and country level variables of interest are robust as the results hold.
4.5 Additional analysis
4.5.1 Pre- and post-crisis period
39
Table 8.
Robustness results | Distributed lag 𝒙𝒕−𝟏 of observed exogenous predictor variables 𝒙𝒕
The table displays the pooled fixed-effect OLS regressions to estimate the effect of creditor- and shareholder rights on the relation between multinationality and cash holdings. The dependent variable is Cash ratio and is measured by cash and short term investments to the book value of total assets. Further definitions and sources of firm- and country level variables can be found in Appendix A. Year- and firm fixed effects are used in all regressions. Robust clustered standard errors at the firm level are presented within the brackets. The symbols ***, **, * indicate statistical significance at the 1%, 5% and 10% levels, respectively.
Dependent variable: Cash ratio
1 2 3 4 5 Multinational -0.008*** [0.002] -0.008*** [0.002] -0.011*** [0.003] -0.008*** [0.002] -0.021*** [0.005] CRIGHTS [0.027] 0.049* [0.027] 0.049* SRIGHTS -0.007*** [0.001] -0.008*** [0.002] Multinational x CRIGHTS [0.002] 0.002 Multinational x SRIGHTS [0.001] 0.004* NWC [0.005] 0.005 [0.005] 0.005 [0.005] 0.005 [0.005] 0.005 [0.005] 0.004 Cashflow -0.031*** [0.005] -0.031*** [0.005] -0.031*** [0.005] -0.031*** [0.005] -0.031*** [0.005] Leverage -0.079*** [0.005] -0.079*** [0.005] -0.079*** [0.005] -0.079*** [0.005] -0.079*** [0.005] Capex -0.085*** [0.010] -0.085*** [0.010] -0.085*** [0.010] -0.085*** [0.010] -0.085*** [0.010] Dividend -0.005*** [0.002] -0.005*** [0.002] -0.005*** [0.002] -0.005*** [0.002] -0.005*** [0.002] R&D 0.022*** [0.014] 0.022*** [0.014] 0.022*** [0.014] 0.022*** [0.014] 0.022*** [0.014] TobinQ 0.007*** [0.000] 0.007*** [0.000] 0.007*** [0.000] 0.007*** [0.000] 0.007*** [0.000] Firmsize -0.004*** [0.000] -0.004*** [0.000] -0.004*** [0.000] -0.004*** [0.000] -0.004*** [0.000] Netdebtissue -0.013** [0.006] -0.013** [0.006] -0.013** [0.006] -0.013** [0.006] -0.013** [0.006] Netequityissue 0.030*** [0.004] 0.030*** [0.004] 0.030*** [0.004] 0.030*** [0.004] 0.030*** [0.004] Tangibility -0.201*** [0.007] -0.201*** [0.007] -0.201*** [0.007] -0.201*** [0.007] -0.201*** [0.007] Log(GDP) [0.000] 0.000 [0.000] 0.000 [0.000] 0.000 [0.004] 0.001 [0.004] 0.001 GDPgrowth -0.000* [0.000] -0.000* [0.000] -0.000* [0.000] -0.001** [0.000] -0.001** [0.000] WGIndex 0.011*** [0.002] 0.011*** [0.002] 0.010*** [0.002] 0.008*** [0.002] 0.008*** [0.002] Constant [0.126] 0.202 [0.133] 0.130 [0.133] 0.133 [0.126] 0.203 [0.126] 0.203 Adjusted R-squared 0.068 .068 0.068 0.068 0.068 Nr. of firms 17,862 17,862 17,862 17,862 17,862 Nr. of observations 162,347 162,347 162,347 162,347 162,347 Fixed effects
Year Yes Yes Yes Yes Yes
40 Panel A, presents the pre-crisis period. Some of the results are different relative to the general regressions in Table 5. Model 1 confirms hypothesis 1 which states that internalization impacts cash holdings. Model 2 show positive but insignificant results for CRIGHTS. This finding differ with previous results and could be caused by the reduced number of observations, which is 103,588. Furthermore, we observe that the interaction between Multinational and CRIGHTS is negative and significant in model 3. This finding is not in line with table 5 and suggests that in the years before the crisis, MNCs have less cash holdings than DCs in countries with strong creditor rights. Further, model 4 shows significant negative results for SRIGHTS and is in line with findings in Table 5. Finally, model 5 shows different results with a negative and significant coefficient for the interaction between SRIGHTS and Multinational. This result suggests that before the crisis, MNCs in strong shareholder right countries experience have even lower cash holdings relative to DCs.
