Corporate Cash Holdings, the Life-Cycle Theory of Dividends, and Legal
Aspects
Abstract
The purpose of this international study is twofold. First, I examine the relationship between corporate cash holdings and the variables related to the life-cycle theory of dividends. The results of the univariate analyses support the life-cycle theory of dividends (DeAngelo et al., 2006). For the multivariate analyses, I find a positive relationship between corporate cash holding levels and firms with moderate and high (RE/TA) ratios. For firms with low (RE/TA) ratios, this relationship is negative. I observe that paying firms strengthen the relationship between mature firms and their cash ratios. In addition, non-paying firms strengthen the relationship between young firms and their cash ratios. Furthermore, the relationship between corporate cash holdings and a country’s legal aspects (intellectual property rights protection and legal origin) are assessed. I document a negative relationship between corporate cash holdings levels and firms in countries who experienced a positive intellectual property rights reform. Finally, the results show that firms from civil law origin and common law origin do not differ in their corporate cash holding levels.
Key Words: cash holdings, civil law, common law, dividends, earned equity, intellectual property rights,
life-cycle theory, payout policy
JEL-Classification: G32, G35, K15, O3
Kees van der Kooij S2021307
University of Groningen
Faculty of Economics and Business
Master’s Thesis MSc International Financial Management
Supervisor: dr. A. De Ridder Co-assessor: dr. L. Dam
1 1. Introduction
The upsurge in cash holding levels (cash-to-assets ratio) of U.S. firms in the past decades has not gone unnoticed in the media.1 U.S. firms together approximately held $1.9 trillion in cash at the end of 2016 and this figure is increasing.2 The accumulation of cash is especially notable in the technology industry. The technology industry is accountable for almost half of the aggregate corporate cash holdings of non-financial U.S. companies. Large tech companies (e.g. Apple, Microsoft, and Google among others) are the key driver of these enormous corporate cash balances. The hoarding of cash contradicts the consensus that corporations rather borrow money to engage in business activities instead of accumulating capital and do nothing with it. Furthermore, from an economic perspective, investing the cash provides the corporation with more opportunities rather than stockpiling it. An article in The New York Times labels this phenomenon as the “cash puzzle” and states that “These companies would be better off investing in anything - a product, a service, a corporate acquisition - that would make them more than 2 cents of profit on the dollar, a razor-thin margin by corporate standards. And yet they choose to keep the cash.”3 The article concludes by suggesting that the cash hoarding may be linked to the impact of the Fourth Industrial Revolution on the economy. Today’s digital economy is information driven. The digital economy is characterized by a fast-paced globalization that induces today’s business environments to be riskier compared to the business environments of the previous century. Therefore, firms are precautious in order to account for uncertain future innovation breakthroughs in which they may directly need large sums of their stockpiled cash.
According to the capital structure irrelevance theorem of Modigliani and Miller (1958), the assumption of a perfect capital market implies that firms do not need target cash balances. This is because the cost of holding cash in a perfect capital market basically is nonexistent (e.g. no taxes, no transaction costs when firms buy and sell assets, no borrowing costs, no bankruptcy costs, and no information asymmetry between agents). Firm value is not dependent on the debt-equity ratio of the firm under the proposition of Modigliani and Miller (1958) which means that there is no incentive for firms to hold certain amounts of cash. In practice, however, markets are imperfect.
1 Henriques, D. B., “Unlike Consumers, Companies Are Piling Up Cash”, The New York Times, March 4, 2008. 2 Badkar, M., “Corporate America’s Cash Pile to Balloon To $1.9tn in 2017 - Moody’s”, Financial Times,
November 20, 2017; Huston, C., “Apple Still on Top as U.S. Corporate Cash Holdings Reach $1.73 trillion”, MarketWatch, May 7, 2015.
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Imperfect capital markets make corporate cash holdings a necessity (Kim et al., 1998). The marginal benefits of holding certain amounts of cash will then need to equal the marginal cost of accumulating excessive cash (Opler et al., 1999). For instance, if a firm normally engages in costly external financing, it encourages the firm from an economic perspective to reconsider its corporate financing decisions for the future. By securing higher cash balances and thus relying more on internal funds to finance future investments and activities, the firm benefits by lessening its dependence on costly external financing. However, the costs of holding higher cash balances also need to be considered. For example, higher levels of liquid assets lead to lower rates of return and possible tax disadvantages. Equaling the marginal benefits and costs of holding cash is especially important for larger firms. This is because larger firms possess considerably more assets on average than small and medium sized firms. Minor changes in the percentage return on assets of large firms can indicate that the firm is not generating substantial returns from its capital investments. Thus, equaling the marginal benefits and costs of holding cash implies that there is a justification for a firm to hold an optimal level of cash.
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to have a positive mean, but a negative median. They attribute this peculiarity to the few highly intensive R&D U.S. firms in the sample that skew the sample. When omitting these firms with high R&D-to-sales ratios, average cash holdings of U.S. firms and their foreign twins were found to be similar. Ferreira and Vilela (2004) examine the determinants of corporate cash holdings in non-Anglo-American countries. Their results report that the determinants of corporate cash holdings in non-Anglo-American countries are similar to the broad line of research on firms in Anglo-American countries.
The Modigliani and Miller (1961) dividend irrelevance theorem states that dividend policy is irrelevant. The theorem hinges on three assumptions. First, they assume perfect capital markets which implies that no transactions made by buyers or sellers of securities can impact the prices of these securities. In addition, all investors have access to public and private information relating to the securities, there are no brokerage costs, no transaction costs, and no tax differentials. Secondly, investors are rational. This indicates that investors will always prefer more wealth over less wealth. Also, investors are indifferent as to whether the increase in wealth stems from dividend income or capital gains. Lastly, investors have perfect certainty. This implies that investors have complete information on future investments and profits of all firms. In general, these assumptions imply that dividend payments do not affect stockholder wealth nor firm value.
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in dividend paying firms were mostly firms that paid small amounts of dividends anyway which did not notably affect the aggregate supply of dividends. Second, an increase in the firms who pay the most real dividends at the top of the aggregate dividend supply exceeded the decrease in firms that paid small amounts of real dividends.
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on the protection of IPR, especially for R&D intensive firms. A firm is expected to be reluctant to invest in IPR related activities in countries with weak IPR protection considering the firm will be unable to reap the full benefits from the investment in that case. This is because investments concerning IPR in countries with weak IPR protection are susceptible to IPR infringement and/or misappropriation. Conversely, firms will be eager to invest in IPR related activities in countries with strong IPR protection seeing that they will be able to better protect their investments and thereby prosper from the benefits that come with the protection.
In this study, 185623 firm-year observations are used from 47 countries between January 2010 and December 2015. By analyzing the relationship between corporate cash holdings and the life-cycle theory of dividends, this study advances the understanding of the life-cycle theory of dividends as proposed by DeAngelo et al. (2006) by examining whether it holds across countries. Specifically, I am interested in gaining insight into whether the corporate life-cycle stage of the dividend or non-dividend paying firm affects the cash balances of these firms.
Next, I investigate the relationship between corporate cash holdings and a country’s legal aspects: IPR protection and legal origin. In order to analyze the relationship between cash holdings and IPR protection, I use a patent index composed by Park (2008) which captures positive or negative IPR reforms in countries in five-year intervals. The patent index indicates the strength of IPR protection in a country and is known in the literature to give a strong approximation of the effect of IPR reforms in a country considering its comprehensive construction (Alimov and Officer, 2017). Using a difference in difference estimation technique and binary variables to capture the positive or negative IPR reform in a country over the sample period, the differential change in cash ratios over time between countries who experienced positive or negative IPR reforms (the treatment group) are compared to countries who did not experience the IPR reform (the control group). By doing this, I acquire insights into whether IPR protection affects cash balances of the firm. In addition, the relationship between corporate cash holdings and the legal origin of a country is examined by classifying the legal system of a country either as civil law or common law according to the studies of LaPorta et al. (1997, 1998).
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Kahle, 2014; DeAngelo et al., 2006). This study, however, uses a worldwide sample covering 47 countries. Secondly, this study documents the effects of IPR protection in a country and the legal origin of a country on corporate cash holding levels. Previous studies have reported the impact of country-level corporate governance (Dittmar et al., 2003; Foley et al., 2007) and country-level factors (Fernandez and Gonenc, 2016) on corporate cash holdings. However, there is no empirical research, to the best of my knowledge, that specifically focuses on the impact of the strength of a country’s IPR protection and legal origin on corporate cash balances. Overall, this study adds to the corporate cash holding line of literature that links cash holdings to the life-cycle theory of dividends and the legal aspects of a country.
I begin by showing that 43.56% of the firms in the sample paid dividends over the period 2010-2015. A two-step approach is used following Baker et al. (2018) to measure the median value of the life-cycle variables and firm characteristics per calendar year which then are computed across the sample period. The results show that firms who do not engage in dividend payments have lower (RE/TE) and (RE/TA) median values compared to firms who pay dividends. In addition, non-dividend paying firms are less profitable and smaller in size compared to dividend paying firms.
Accordingly, this study continues by providing a comprehensive analysis between the cash holdings of dividend and non-dividend paying firms by following the categorizing method of the life-cycle variables as reported by Baker et al. (2018). The results show that as the (RE/TE) ratio increases, the fraction of dividend paying firms also increase. However, the fraction of dividend paying firms falls when moving to the highest category of (RE/TE) median values. These findings are similar to the findings reported by DeAngelo et al. (2006) and Baker et al. (2018) and thus support the life-cycle theory of dividends.
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Subsequently, this study conducts multiple OLS regressions to examine the relationship between corporate cash holdings and the life-cycle stage of a firm. I show that there is a negative relationship between firms with low (RE/TA) ratios and their cash ratios. As firms mature in this group, their cash ratios decrease. In the moderate (RE/TA) group and the high (RE/TA) group, however, a positive relationship is observed. This reflects that firms hoard more cash as they mature in these groups. Further, I find that the relationship between young firms and their cash ratios strengthens when the firm does not pay dividends. In addition, paying dividends appears to strengthen the relationship between mature firms and their cash ratios.
Finally, the relationship between corporate cash holdings and intellectual property rights is investigated by employing a difference in difference estimation technique to analyze the average effect of IPR reforms on the cash ratio for firms in countries who experienced an increase or a decrease in IPR protection during the sample period. The cash ratios of firms in countries who experienced a positive IPR reform decreased when compared to the cash ratios of firms in countries who did not experience the positive IPR reform. On the other hand, the cash ratios of firms in countries who experienced a negative IPR reform increased compared to countries who did not experience the negative IPR reform. Lastly, the cash ratios of firms in civil law countries and common law countries do not differ. Firms in civil law countries hold the same amount of cash as firms in common law countries. The legal origin of a country therefore does not appear to affect corporate cash holdings.
The remainder of this paper proceeds as follows. Section 2 reviews the literature. Section 3 proceeds by presenting the hypotheses development. Section 4 describes the sample, data and methodology of this study. Section 5 reports the empirical results of the regressions and performs a robustness check. Section 6 interprets the main results and offers concluding remarks.
2. Literature review
2.1 Corporate cash holdings: motives and theories
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transactions and make cash payments or convert non-cash assets into cash. This leads to larger firms holding less cash in general considering there are economies of scales. The second motive is the precautionary motive. This motive acts as safety measure for the firm to hold a certain amount of cash to account for uncertain future events. Examples would be firms that have risky cash flows or firms that have poor access to capital markets. Thus, the firm accumulates cash that functions as an additional source of funding to finance its activities and investments. The third motive is the tax motive which implies that the level of cash holdings depends on the tax incentives of repatriation. Firms with high repatriation taxes tend to have higher cash holdings. Lastly, there is the agency motive. This motive suggests that cash holding levels vary depending on the investment opportunities of the firm and the extent of agency problems between managers and shareholders of a firm. Firms that have high cash levels are more likely to incur agency costs such as monitoring costs. These are costs that arise when managers do not act in accordance with the principle of shareholder wealth maximization.
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large sums of their stockpiled cash. Further, the findings of Dittmar et al. (2003) reinforce the trade-off theory as well. Their results demonstrate that firms with high market-to-book ratios, firms with high R&D expenditures, and firms that are profitable tend to have high levels of cash, whereas large firms and firms with high net working capital hold less cash.
The second perspective of the optimal capital structure of firms is the pecking order theory (Myers and Majluf, 1984; Myers and Sunder, 1999; Opler et al, 1999; Dittmar et al., 2003). The pecking order theory assumes that there is no optimal level of debt and no optimal level of cash. Cash balances are the outcome of corporate financing decisions that gravitate towards following a hierarchy. It is the result of asymmetric information and complications with external financing. Myers and Majluf (1984) argue that firms rather rely on internal financing than on external financing. The reason for this is that asymmetric information can be reduced internally. Also, they prefer debt financing over equity financing. The debt ratio depends on the internal sources of funds of the firm which in turn explain the changes in cash holdings. This means that an increase in internal funds decrease the leverage of the firm. The excess of internal funds will cause the firm to accumulate cash and pay off its debts. On the contrary, a shortfall of internal funds results in lower cash balances and will lead the firm to raise its debt levels. Therefore, internal resources play an important role in determining cash balances. Issuing equity or share repurchases are not considered under this view because agency costs make equity quite costly. Myers and Sunder (1999) note that issuing equity or share repurchases are only considered as a last resort. The motive of repurchasing shares or paying down debt under this view only exists when a firm has a surplus of internal funds and there are tax burdens or other costs of holding these excess funds.
10 2.2 The life-cycle theory of dividend payout policy
The fact that U.S. firms hold more cash is associated with the disappearing dividend phenomena of Fama and French (2001). Fama and French (2001) attribute the disappearing cash dividend payout trend of U.S. firms partly to changing characteristics of publicly traded firms. They observe that small firms that are defined by low earnings and strong growth opportunities typically do not engage in dividend payout policies. Contrarily, firms with high earnings and weak growth opportunities are more inclined to pay dividends. In addition, they found that U.S. firms pay less dividends in general regardless of their firm characteristics. This stipulates the deterioration of the advantages of paying dividends over time. Denis and Osobov (2008) report that the declining propensity of U.S. firms paying dividends does not rigorously apply to other countries. They examine the propensity to pay dividends over the period 1989-2002 in the United States and various other developed countries (Canada, Germany, France, Japan, and The United Kingdom). Their results show that firm size, growth opportunities, and profitability are determinants of dividend policies across countries.
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concentration of stock ownership affects dividend payout policy in Sweden.
In short, previous research has reported that small firms with low earnings and strong opportunities for growth generally do not pay dividends. On the other hand, large firms with high earnings and weak opportunities for growth typically do engage in dividend payments. Thus, firm size, growth opportunities, and profitability are determinants of dividend payout policies. DeAngelo et al. (2006) introduce the life-cycle theory of dividends. This theory suggests that there is a positive relationship between the probability of for a firm to pay dividends and the firm’s earned to contributed capital mix. The maturity of a firm hereby is based on the fraction of the firm’s retained earnings to total equity (RE/TE) and retained earnings to total assets (RE/TA).
2.3 Legal origin and intellectual property rights
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1998) examine the differing legal environments (civil law vs common law) of firms and their ability to raise external finance by means of debt or equity. They argue that external finance is higher valued and consists of more extensive capital markets in countries in which the legal protection of investors is better. They show that civil law countries have the weakest protection for investors. Also, the capital markets of civil law countries are the least developed. In contrast, common law countries have strong investor protection and have the most developed capital markets.
According to “the theory of law and finance”, financial development and economic growth is better in common law countries than in civil law countries (Graff, 2008). Although the roots of the two main legal systems are biased towards investor protection and the development of capital markets, the present legal system of a country, regardless of origin, is gradually adjusted and improved throughout time. This implies that both common law and civil law countries apply new sets of comprehensive rules and procedures in order to stimulate financial development and economic growth. An example is the establishment of the Economic and Monetary Union which indicates a major step towards integration and coordination of economic and fiscal policies of European Union economies. More specifically, the markets in financial instruments directive (MiFID) is an example of an important European Union regulation that aims to stimulate financial market development and harmonize protection for investors in European Union countries. Thus, even though most European countries do not favor investors or capital market development based on their civil law origin, countries do continually take measures to foster financial development and economic growth.
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innovation (Bilir, 2014; Branstetter, 2006; Kanwar and Evenson, 2003). Firm valuation also appears to increase for firms that engage in business environments that have high levels of economic development and solid patent protection (Gao and Chou, 2015). By attaining monopoly power over their R&D innovations, firms can obtain returns more readily from their investments. Moreover, the protection of IPR also positively affects cross-border M&A activity (Alimov and Officer, 2017). Alimov and Officer (2017) report that positive IPR reforms stimulate inbound M&A activity. More specifically, an increase in the strength of IPR protection in intellectual capital-intensive industries increases M&A activity. Additionally, this applies to M&As in which the IPR protection of the target country is lower than the IPR protection of the acquirer. The authors also find that synergy gains in cross-border M&As positively relate to IPR reforms.
Overall, the legal system of a country originates from the civil law tradition or the common law tradition. The theory of law and finance argues that common law countries have better capital development and investor protection than civil law countries when the roots of both legal systems are considered. In contemporary society, however, both civil law countries and common law countries continuously apply new sets of rules and procedures that aim to stimulate financial development and economic growth. Patent protection in a country is an example of promoting economic development by increasing the strength of the legal environment concerning intellectual property investments.
3. Hypotheses development
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firms. However, they also report that better performing firms have higher cash holdings than the trade-off theory predicts. This is because firms accumulate cash based on the precautionary motive. Firms save up their cash because they may need it in the future for their investments in case their cash flow is low or external financing is expensive.
Based hereupon, firms who pay dividends have low cash ratios compared to non-dividend paying firms. However, mature firms who are profitable and are large in size have high cash ratios considering they increase their cash levels based on the precautionary motive. A prerequisite for firms reaching the maturity stage of their corporate life-cycle is that they grow in size and are profitable. Therefore, it is expected that as firms mature, their cash levels increase based on the precautionary motive. The first hypothesis is formulated as follows:
Hypothesis 1: There is a positive relationship between corporate cash holding levels and firms
with higher earned to contributed capital ratios (i.e. as firms mature)
Previous research confirms the notion that the dividend payout choice of a firm is contingent on its mix of earned and contributed capital (Baker et al., 2018; Bulan et al., 2007; DeAngelo et al., 2006; Denis and Osobov, 2008). The life-cycle theory of dividends suggests that there is a strong relationship between dividend paying firms and the life-cycle variables. Firms with high (RE/TE) and (RE/TA) ratios are more likely to pay dividends. Conversely, firms with low (RE/TE) and (RE/TA) ratios are less likely to pay dividends. In addition, Bulan et al. (2007) show that the decision whether to pay dividends or not depends on the life-cycle stage of the firm. Dividend paying firms tend to be large and are more stable in generating profits.
Based on the above discussion, mature firms are more likely to pay dividends. Hence, paying dividends is expected to strengthen the relationship between corporate cash holdings and firms with high earned to contributed capital ratios. Thus, the following hypothesis is derived:
Hypothesis 2: Paying firms strengthen the relationship between corporate cash holdings and high
earned to contributed capital ratios of the maturing firm
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Although both civil law and common law countries continuously stimulate financial development and economic growth by applying new sets of rules and procedures in contemporary society, the roots of common law countries favor the interests of the private market whereas the roots of civil law countries are more fixated on the interest of the state. Therefore, common law countries traditionally have better legal protection for investors than civil law countries (La Porta et al., 1997, 1998). This implies that in common law countries, external financing has a higher valuation and capital markets are more developed. Consequently, firms in common law countries are more likely to engage in external financing and have easier access to capital markets.
Thus, it is expected that firms in common law countries have lower cash ratios than firms in civil law countries. This is because, based on the traditional view of both legal systems, investors are better protected in common law countries and are stimulated to engage in investment projects. The third hypothesis is formulated as follows:
Hypothesis 3: There is a negative relationship between corporate cash holdings levels and firms
in common law countries
The patent index confirms that developed countries generally employ stronger IPR protection than developing countries (Ginarte and Park, 1997; Park, 2008). The strength of IPR protection in a country is expected to influence the cash management policy of the firm. Strong IPR protection in a country suggests that firms would be eager to invest in intellectual property related activities since they are able to reap the benefits from the investment.
Consequently, it is expected that these firms lower their cash ratios and use more of their cash to engage in investment projects. The existing body of literature concerning IPR protection does not specifically delve into its impact on corporate cash holding levels. Thus, based on the assumptions regarding IPR protection in a country, the following hypothesis is formulated:
Hypothesis 4: There is a negative relationship between corporate cash holding levels and firms
16 4. Data and methodology
4.1 Sample selection and variables
This study covers publicly traded firms from the Compustat - Capital IQ database from January 2010 until December 2015. The firm-level observations in this analysis are based on fiscal year-end dates. Firms that operate in regulated industries are excluded from the final sample: financial firms (SIC 6000-6999), utilities (SIC 4900-4999) and public administration (SIC 9000-9999). The firm-level data consists of financial data that is used to calculate the ratios of the main variables and control variables of this study. The data for non-U.S. firms are obtained from Compustat Global and the data for U.S. firms from Compustat North America.
Country-level data is retrieved from various sources. Whether a country is classified as either common law origin or civil law origin is based on the classification of the legal origin of the country according to La Porta et al. (1997, 1998). The data comprising the economic development of a country is obtained from the World Development Indicators (WDI) database and the data that encompasses the legal and business environment of a country is gathered from the Worldwide Governance Indicators (WGI) database. Both WDI and WGI are part of the World Bank Group. Further, the patent index data is collected from Park (2008).4 The index is updated until 2015 with support of the Property Rights Alliance (PRA) and captures the strength of IPR protection in five-years intervals. The final sample only includes the countries of the patent index from which firm-level data was obtained from Compustat. In addition, these countries are either developed or developing economies as classified by the World Economic Situation and Prospects list of the United Nations (2018). Accordingly, the final sample data contains an unbalanced panel of 185623 firm-year observations covering 47 countries from the period 2010 until 2015. All firm-level variables are winsorized at the 1st and 99th percentiles in order to mitigate outliers.
The dependent variable in this analysis is the level of corporate cash holdings of a firm. It is denoted as Cash Ratio and is measured by dividing the cash and short-term investments by total assets (Duchin, 2010; Fernandez and Gonenc, 2016). Furthermore, the main independent variables for the OLS regressions are Payer, RE/TA, Treatment, Post and Common Law. The variables will be measured as follows: Payer is a binary variable and indicates whether firms pay dividends. It takes the value of 1 when the firm pays dividends or the value of 0 when the firm does not pay dividends (Bates et al., 2009; Duchin, 2010; Fernandez and Gonenc, 2016). Additionally, the
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firm’s life-cycle will be proxied by RE/TA (DeAngelo et al., 2006). The firm will either be in its growth stage or in a more mature stage depending on its (RE/TA) ratio. Three separate variables will be used to indicate whether the firm is in the low (30%), moderate (40%), or high (30%) RE/TA group of the sample. RE/TA is measured by dividing the retained earnings by total assets (DeAngelo et al., 2006; Baker et al., 2018). Next, this study uses two indicator variables (Treatment and Post) to capture the IPR reform in a country over the sample period following the method of Alimov and Officer (2017). The variable Treatment takes the value of 1 when the IPR reform increases IPR protection over the period January 2010 – December 2015 or the value of 0 when the IPR reform decreases the IPR protection over the period January 2010 – December 2015. In addition, the variable Post takes the value of 1 to capture the period after the IPR reform or it takes the value of 0 in case the IPR reform has not taken place. Lastly, Common Law is assessed by employing a binary variable (LaPorta et al., 1997, 1998). The dummy variable either takes the value of 1 for common law countries or the value of 0 for civil law countries.
The regressions in this analysis include both firm-level and country-level control variables. The firm-level controls are chosen based on existing literature relating to corporate cash holdings (Bates et al., 2009; Dittmar et al., 2003; Duchin, 2010; Fernandez and Gonenc, 2016) and the life-cycle theory of dividends (Baker et al., 2018; Banyi and Kahle, 2014; DeAngelo et al., 2006). The following firm-level variables have been found to affect corporate cash holdings (Bates et al., 2009; Dittmar et al., 2003; Duchin, 2010; Fernandez and Gonenc, 2016): Leverage, the sum of debt in current liabilities and long-term debt, divided by total assets; Net Working Capital, the sum of current assets minus current liabilities minus cash and short-term investments, divided by total assets; Tangibility, property, plant and equipment divided by total assets; Profitability, net income divided by total assets; and Firm Size, the natural logarithm of total assets; Capex, capital expenditures divided by total assets (Bates et al., 2009; Duchin, 2010; Fernandez and Gonenc, 2016); R&D, research and development expenses divided by total sales (Bates et al., 2009; Dittmar et al., 2003); RE/TE, the retained earnings divided by the total common equity (Baker et al., 2018; Banyi and Kahle, 2014; DeAngelo et al., 2006).
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annual growth percentage is denoted as GDP Growth. Both these country-level variables are based on U.S. Dollars and control for the economic development of a country. Also, this study will control for the business and legal environment by controlling for two dimensions of governance performance: the degree to which public power is exerted for private gain (Control of Corruption), and the competence of the government to formulate implement policies and regulations that stimulate the private sector development (Regulatory Quality). Both dimensions are part of the World Governance Indicator index which proxies for country governance performance as measured by the World Bank. Both governance indicators are based on an index which ranges from -2.5 (weak) to 2.5 (strong) governance performance.
4.2 Sample characteristics
Table 1 reports the following summary statistics based on legal origin: the number of observations, cash ratio, patent index strength, GDP growth, and GDP per capita. Countries in the sample are categorized based on their corresponding legal family (La Porta et al., 1997, 1998): common law or civil law. Countries from the English family5 are classified as common law countries. The countries from the German family6, French family7 and Scandinavian family8 fall under the civil law origin. Countries from English origin constitute most of the sample with 92522 observations. The German origin countries average the highest cash ratio (0.202) and French origin countries average the lowest cash ratio (0.126). Further, IPR protection is the highest among Scandinavian origin countries and the lowest in French origin countries. Next, English origin countries experienced the highest annual GDP growth (3.947%) during the sample period and Scandinavian origin countries the lowest (1.569%). In addition, Scandinavian origin countries averaged the highest GDP per capita during the sample period and French origin countries the lowest.
Panel A of Table 2 shows the summary statistics of all the firm-level and country-level variables used in this study over the sample period January 2010 - December 2015. It reports the mean, median, and standard deviation of the variables based on all observations. The mean cash ratio of the total sample is 0.172. The total sample reports the following values for the medians of
5 Australia, Canada, Hong Kong, India, Ireland, Israel, Malaysia, New Zealand, Singapore, South Africa, Thailand,
United Kingdom, and United States.
6 Austria, China, Czech Republic, Germany, Hungary, Japan, Korea Republic, Poland, Switzerland, and Taiwan. 7 Argentina, Belgium, Brazil, Chili, Colombia, Egypt, France, Greece, Indonesia, Italy, Mexico, The Netherlands,
Philippines, Portugal, Romania, Russian Federation, Spain, and Turkey.
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the life-cycle variables: 0.279 for retained earnings to total equity (RE/TE) and 0.084 for retained earnings to total assets (RE/TA).
Panel B of Table 2 shows the correlation matrix of all the firm-level variables. The dependent variable of this study, the cash ratio, shows no signs of strong multicollinearity with the other variables used in this analysis.
Table 1 Sample by legal origin
Sample by legal origin. This table reports the number of observations per legal origin, and the means of cash ratio, patent index strength, GDP growth and GDP per capita per legal origin. The sample period is from January 2010 – December 2015. Cash Ratio: cash and short-term investments / total assets, Patent Index: patent index originally composed by Ginarte and Park (1997), updated by Park (2008) and Property Rights Alliance (2015). The index captures the strength of IPR protection of a country in five-years intervals, GDP per capita: proxies for economic development in USD, GDP Growth: annual growth in percentages based on USD. A more detailed table per country can be found in appendix A.
Legal origin N Cash Ratio Patent Index GDP Growth (%) GDP per Capita ($) English 92522 0.163 3.693 3.947 34564.483 German 64893 0.202 3.875 2.810 33088.582 French 22211 0.126 3.482 2.514 18438.382 Scandinavian 5997 0.164 4.082 1.569 61003.886 Total sample 185623 0.172 3.699 2.874 30488.79
Table 2 Summary statistics
Panel A of this table reports the summary statistics of the firm-level and country-level variables used in this analysis. The sample period is from January 2010 – December 2015. The firm-level variables are defined as follows. Cash Ratio: cash and short-term investments / total assets, Dividend Payout: dividends paid / net income, CAPEX: capital expenditures / total assets, R&D: research & development expenditures / total sales, RE/TE: ratio of retained earnings / total equity, RE/TA: ratio of retained earnings / total assets, Leverage: (debt in current liabilities + long-term debt) / total assets, Net Working Capital: (current assets – current liabilities – cash and short-term investments) / total assets, Firm Size: natural logarithm of total assets, Profitability: net income / total assets, Tangibility: property, plant and equipment / total assets. The country-level variables are defined as follows. Regulatory Quality and Control of Corruption: two dimensions of the World Governance Indicator index which proxy for country governance performance as measured by the World Bank, GDP Growth: Annual GDP growth in percentages of a country, Patent Index: composed by Ginarte and Park (1997) and updated by Park (2008) and Property Rights Alliance (2015). The index captures the strength of IPR protection in a country in five-year intervals, Ln (GDP per Cap.): Natural logarithm of GDP per capita in USD of a country. Panel B reports the correlation matrix of the firm-level variables used in the multivariate regression framework.
Panel A: all variables
Variable Mean Median Std.Dev. Min Max
Firm-level N = 185623 Cash Ratio 0.172 0.109 0.185 0.000 0.879 Dividend Payout 0.014 0.000 0.033 0 0.218 CAPEX 0.047 0.026 0.062 0 0.342 R&D 0.073 0.000 0.390 0 3.449 RE/TE -0.186 0.279 4.117 -27.352 16.137 RE/TA -0.577 0.084 3.251 -25.985 0.779 Leverage 0.237 0.181 0.257 0 1.556
Net Working Capital -0.016 0.004 0.290 -1.824 0.529
20 Panel B: correlation matrix
Table 3 shows the sample distribution. Panel A sorts the observations by year and groups the observations into dividend and non-dividend paying firms. Over the sample period 2010-2015, on average, 43.56% of the firms pay dividends and 56.44% of the firms do not pay dividends.
Panel B reports the median values of the following variables: retained earnings to total equity (RE/TE), retained earnings to total assets (RE/TA), total equity to total assets (TE/TA), profitability, and firm size. The table sorts the life-cycle variables by year and distinguishes between dividend paying firms and non-dividend paying firms. The life-cycle variables have been documented in the literature to correspond with dividend payout decisions (Baker et al., 2018; Banyi and Kahle, 2014; DeAngelo et al., 2006). Following the two-step approach of Baker et al. (2018), the median value is first measured per calendar year and then computed across the sample period (2010-2015). The results of panel B are similar to the findings of Baker et al. (2018). The table clearly shows the distinction between dividend paying firms and non-dividend paying firms. First, the retained earnings to total equity (RE/TE) of dividend paying firms report an average median of 0.484 compared to the average median of non-dividend paying firms: 0.121. Additionally, the median of the retained earnings to total assets (RE/TA) of dividend paying firms averages 0.182 which is substantially higher than that of non-dividend paying firms: 0.012. Next, the median of the total earnings to total assets (TE/TA) of dividend paying firms averages 0.475 which is less than the average median of non-dividend paying firms: 0.485. Furthermore, the results show that both dividend and non-dividend paying firms are profitable over the sample period. The median of the profitability of dividend paying firms averages 3.6% as opposed to the average profitability of non-dividend paying firms: 0.1%. Finally, the average firm size of dividend
21
paying firms is 3.516 and the firm size of non-dividend paying firms is 2.689.
The overall mean differences between the life-cycle variables (RE/TE), (RE/TA) and (TE/TA) of dividend paying firms and non-dividend paying firms across the sample period (20102015) are all statistically significant at the 1% level. For (RE/TE), the overall mean difference is -0.363. This indicates that the non-dividend paying group contains more younger firms with lower corresponding (RE/TE) ratios. In contrast, the dividend paying group averages higher (RE/TE) ratios which indicates that more mature firms were present in this group across the sample period. The results are comparable when moving to the (RE/TA) group. The overall mean difference between dividend and non-dividend paying firms in this group is -0.170. The overall mean difference for (TE/TA) between the two groups is 0.010. This suggests that the non-dividend paying group contains slightly more leveraged firms across the sample period. The overall mean difference between the firm characteristics of dividend paying firms and non-dividend paying firms across the sample period are statistically significant at the 1% level as well. For profitability, the overall mean difference is -0.035. This suggests that non-dividend paying firms are less profitable than dividend paying firms. The overall mean difference for firm size is -0.827 implying that non-dividend paying firms are smaller in size than dividend paying firms.
In summary, these findings show that non-paying firms have lower (RE/TE) and (RE/TA) median values, but higher (TE/TA) values compared to firms who do engage in dividend payments. Also, non-paying firms are less profitable, and are smaller in size compared to paying firms.
Table 3 Sample distribution by year, life-cycle variables and firm characteristics
Panel A splits the sample into dividend and non-dividend paying firms. The sample covers the period January 2010 - December 2015. The first column sorts the observations by year and the second column shows the corresponding firm-year observations in that particular year. Column three shows the amount of observations of dividend paying firms in a particular year and column four reports the fraction of dividend paying firms in percentages. Columns five and six do the same for dividend paying firms. Panel B provides a univariate analysis between dividend and non-dividend paying firms for the three life-cycle variables and two firm characteristics: retained earnings to total equity (RE/TE), retained earnings to total assets (RE/TA), total equity to total assets (TE/TA), profitability (net income / total assets), and firm size (natural logarithm of total assets). The last column in Panel B presents the mean differences between dividend and non-dividend paying firms. *** denotes statistical significance at
the 1% level. Panel A: year
Year N Dividend paying % Non-dividend paying %
22 Panel B: life-cycle variables and firm characteristics
Dividend paying Non-dividend paying
Year Median Median Differences in means
RE/TE 2010 0.474 0.066 -0.408*** 2011 0.493 0.118 -0.375*** 2012 0.502 0.131 -0.371*** 2013 0.503 0.139 -0.364*** 2014 0.488 0.149 -0.339*** 2015 0.456 0.097 -0.359*** 2010-2015 0.484 0.121 -0.363*** RE/TA 2010 0.185 -0.010 -0.195*** 2011 0.184 0.025 -0.159*** 2012 0.177 0.026 -0.151*** 2013 0.176 0.024 -0.152*** 2014 0.182 0.020 -0.162*** 2015 0.185 0.002 -0.183*** 2010-2015 0.182 0.012 -0.170*** TE/TA 2010 0.491 0.454 -0.037*** 2011 0.464 0.500 0.036*** 2012 0.462 0.494 0.032*** 2013 0.463 0.492 0.029*** 2014 0.476 0.488 0.012*** 2015 0.492 0.473 -0.019*** 2010-2015 0.475 0.485 0.010*** Profitability 2010 0.036 -0.003 -0.039*** 2011 0.038 0.010 -0.028*** 2012 0.035 0.005 -0.030*** 2013 0.034 0.001 -0.033*** 2014 0.035 0 -0.035*** 2015 0.036 0 -0.036*** 2010-2015 0.036 0.001 -0.035*** Firm Size 2010 3.593 2.586 -1.007*** 2011 3.472 2.683 -0.789*** 2012 3.476 2.720 -0.756*** 2013 3.484 2.740 -0.744*** 2014 3.513 2.737 -0.776*** 2015 3.534 2.631 -0.903*** 2010-2015 3.516 2.689 -0.827*** 4.3 Methodology
23
sample. The relationship between the three variables and corporate cash holdings are then examined separately. Model 1 uses the following regression equation:
𝐶𝑎𝑠ℎ 𝑅𝑎𝑡𝑖𝑜𝑘,𝑡 −1 = 𝛼 + 𝛽1 𝑅𝐸/𝑇𝐴𝑘,𝑡 −1 + 𝛴 𝛾 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠𝑘,𝑡−1 + 𝛿 𝑇𝐸 + 𝜇 𝐹𝐸𝑘,𝑡+ 𝜀𝑘,𝑡 (1)
The second and third regression model add interaction terms to the model. The interaction terms are employed in order to capture the moderating effect of not paying dividends (model 2) or paying dividends (model 3) on the relationship between corporate cash holdings and the life-cycle stage of the firm. The (RE/TA) coefficient again signals the life-cycle stage of the firm whereas Payer indicates whether the firm pays dividends or not. The (RE/TA * Payer) coefficient expresses whether the interaction term strengthens or weakens the relationship between corporate cash holdings and the life-cycle stage of the firm. The following regression equation is used to test model 2 and 3:
𝐶𝑎𝑠ℎ 𝑅𝑎𝑡𝑖𝑜𝑘,𝑡 −1 = 𝛼 + 𝛽1 𝑅𝐸/𝑇𝐴𝑘,𝑡 −1 + 𝛽2 𝑃𝑎𝑦𝑒𝑟𝑘,𝑡−1+ 𝛽3 (𝑅𝐸/𝑇𝐴𝑘,𝑡−1 ∗ 𝑃𝑎𝑦𝑒𝑟)𝑘,𝑡−1
+ 𝛴 𝛾 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠𝑘,𝑡−1 + 𝛿 𝑇𝐸 + 𝜇 𝐹𝐸𝑘,𝑡 + 𝜀𝑘,𝑡 (2)
Regression model 4 and 5 test the average effect of positive and negative IPR reforms on corporate cash holdings by employing a difference in difference estimation technique. It regresses corporate cash holdings on a variable that captures the differential change in cash ratios during the sample period between the treatment group (countries who experienced positive or negative IPR reforms) and the control group (countries who did not experience the positive or negative IPR reform). Both Treatment and Post are indicator variables. Treatment captures the positive or negative IPR reforms and Post captures the period after the reform was employed. The coefficient Treatment * Post thus expresses the differential change in cash ratios between the treated group and the control group. The regression model that tests the average impact of positive or negative IPR reforms on corporate cash holdings can be denoted as follows:
𝐶𝑎𝑠ℎ 𝑅𝑎𝑡𝑖𝑜𝑘,𝑡 −1 = 𝛼 + 𝛽1 𝑇𝑟𝑒𝑎𝑡𝑚𝑒𝑛𝑡𝑘,𝑡−1+ 𝛽2 𝑃𝑜𝑠𝑡𝑘,𝑡−1+ 𝛽3 (𝑇𝑟𝑒𝑎𝑡𝑚𝑒𝑛𝑡𝑘,𝑡−1∗
24
Finally, regression model 6 adds a binary variable (Common Law) to the regression in order to investigate the unique relationship between the legal origin of a country and corporate cash holdings. The variable either takes the value of 1 for common law countries or 0 for civil law countries. Thus, the regression equation for model 6 is as follows:
𝐶𝑎𝑠ℎ 𝑅𝑎𝑡𝑖𝑜𝑘,𝑡 −1 = 𝛼 + 𝛽1 𝐶𝑜𝑚𝑚𝑜𝑛 𝐿𝑎𝑤𝑘,𝑡−1 + 𝛴 𝛾 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠𝑘,𝑡−1 + 𝛿 𝑇E + μ 𝐹𝐸𝑘,𝑡 + 𝜀𝑘,𝑡 (4)
For all regression equations, the subscript k indexes country and the subscript t is an index for the year. Moreover, all the independent variables will be lagged by one year. The model includes country, year, and industry fixed effects. By doing this, variation in shocks can be captured within the same country. Additionally, this tackles the omitted variable bias since it permits multiple shocks to various countries at various times. Standard errors are also clustered by country.
5. Empirical results
5.1 Dividend paying firms and the life-cycle variables
25
0.90+, the fraction of dividend paying firms decreases to 48.4% which supports the findings of Baker et al. (2018) and DeAngelo et al. (2006).
Thus, the results confirm the life-cycle theory of dividends and support the findings of Baker et al. (2018), Banyi and Kahle (2014), and DeAngelo et al. (2006). Although the fraction of dividend paying firms is substantially higher in the study of Baker et al. (2018) for most categories, this analysis clearly shows an upward trend between the <0.00-0.90 categories of the two life-cycle variables (RE/TE) and (RE/TA) and the fraction of firms that pay dividends (except for the 0.90+ category). Thus, the findings of this study are in line with previous research.
Table 4 Dividend paying firms and the life-cycle variables: 2010-2015
Column one in this table sorts and groups firms into one of the 11 categories for each calendar year of the sample period (January 2010 – December 2015) based on their size (value of the median) of the life-cycle variables: retained earnings to total equity (RE/TE), retained earnings to total assets (RE/TA), total equity to total assets (TE/TA). Columns two, five, and eight report the total observations of the three life-cycle variables. Columns three, six, and nine show the fraction of dividend paying firms of the three-cycle variables. Columns four, seven and ten report the percentages of dividend paying firms. For each category of the three life-cycle variables, the fraction of dividend paying firms is divided by the total number of observations in the same category.
RE/TE RE/TA TE/TA
Total N PAY N PAY % Total N PAY N PAY % Total N PAY N PAY % Size <0.00 55405 13885 25.1 64392 15284 23.7 9716 1700 17.5 0.00-0.10 12846 3727 29.0 33600 13750 40.9 7531 3421 45.4 0.10-0.20 13367 4563 34.1 29109 13809 47.4 12537 5645 45.0 0.20-0.30 14231 5749 40.4 20823 12027 57.8 18391 8454 46.0 0.30-0.40 13278 6584 49.6 14384 9429 65.6 23943 11610 48.5 0.40-0.50 12619 7011 55.6 9754 6702 68.7 25870 12772 49.4 0.50-0.60 12118 7462 61.6 6166 4422 71.7 25175 12024 47.8 0.60-0.70 11578 7709 66.6 3827 2784 72.7 21602 9878 45.7 0.70-0.80 10425 7434 71.3 3568 2648 74.0 18185 8187 45.0 0.80-0.90 9169 6769 73.8 0 0 0 13892 5320 38.3 0.90+ 20587 9962 48.4 0 0 0 8781 1844 21.0
5.2 Cash holdings and the life-cycle variables
26
(0.137) compared to non-dividend paying firms (0.152). Next, in the group with moderate (RE/TA) ratios, the cash ratio of dividend paying firms averages 0.192 and that of non-dividend firms averages 0.184. Finally, in the high (RE/TA) ratios group, the cash ratio of dividend paying firms averages 0.271 and that of non-dividend paying firms 0.260. When examining the changes of cash ratios within the dividend and non-dividend paying firms groups separately, the results show a clear increase in cash holdings when the firms are sorted according to their (RE/TA) ratios. In particular, when comparing the cash ratios of dividend paying firms with low and moderate (RE/TA) ratios, firms increase their average cash holdings from 0.137 to 0.192 when they move into the moderate (RE/TA) ratio bracket. In addition, the average cash ratio increases to 0.271 when moving to the high (RE/TA) ratio bracket. The same observation can be made when examining the average cash ratios of non-dividend paying firms: the average cash ratio of firms increases from 0.152 to 0.184 when moving from the low (RE/TA) group to the moderate (RE/TA group). Further, the average cash ratio then increases to 0.260 for firms that move into the high (RE/TA) group.
27
Table 5 Cash holdings and retained earnings to total assets of dividend and non-dividend paying firms
Panel A of this table shows the total observations and means of the cash ratios of dividend paying firms per calendar year when these firms are sorted and grouped into three categories based on their retained earnings to total assets (RE/TA) ratios. The three categories are classified as low, moderate, or high (RE/TA). The low category presents firms with (RE/TA) ratios of the bottom 30% of the sample, the moderate category represents the next 40% of sample firms, and the high category shows firms with (RE/TA) ratios of the top 30% of the sample. Panel B does the same for non-dividend paying firms.
Panel A: dividend paying firms
Low RE/TA Moderate RE/TA High RE/TA
Cash Ratio Cash Ratio Cash Ratio
N Mean N Mean N Mean
Year 2010 7479 0.150 4020 0.197 488 0.275 2011 6805 0.127 3694 0.193 415 0.272 2012 6965 0.128 3724 0.187 441 0.256 2013 6900 0.127 3759 0.188 439 0.270 2014 7261 0.137 3883 0.190 438 0.271 2015 8631 0.149 4257 0.197 427 0.284 2010-2015 44059 0.137 23337 0.192 2648 0.271
Panel B: non-dividend paying firms
Low RE/TA Moderate RE/TA High RE/TA
Cash Ratio Cash Ratio Cash Ratio
N Mean N Mean N Mean
Year 2010 5855 0.134 1610 0.173 168 0.268 2011 9036 0.164 1727 0.198 154 0.234 2012 9088 0.164 1769 0.189 136 0.256 2013 9113 0.160 1820 0.183 151 0.256 2014 8550 0.146 2041 0.183 153 0.282 2015 6899 0.136 1827 0.180 158 0.263 2010-2015 48541 0.152 10794 0.184 920 0.260 5.3 Regression results
First, the relationship between corporate cash holdings and the life-cycle theory of dividends is examined using a multiple OLS regression framework. The dependent variable in this framework is the cash ratio of the firm. The following two hypotheses are tested: (i) whether there is a positive relationship between corporate cash holding levels and firms with higher earned to contributed capital ratios and (ii) whether paying firms strengthen the relationship between corporate cash holdings and high earned to contributed capital ratios of mature firms.
28
holdings. Column 1 shows that the estimated coefficient on the low (RE/TA) group is negative (-0.011) and highly statistically significant (t-statistic = -7.43). This implies that there is a negative relationship between firms with low (RE/TA) ratios and their corporate cash holdings. More specifically, as firms mature within this group, their cash ratio decreases. Next, the estimated coefficient on the moderate (RE/TA) group is positive (0.017) and highly statistically significant (t-statistic = 8.06) reflecting a positive relationship between firms with moderate (RE/TA) ratios and their corporate cash holdings. This means that in the moderate (RE/TA) group, the cash ratio increases if (RE/TA) increases. Thus, in the moderate (RE/TA) group, firms hold more cash as they mature. Finally, for the high (RE/TA) group, the estimated coefficient is positive (0.073) and highly statistically significant as well (t-statistic = 15.31). This also infers that the cash ratio increases when (RE/TA) increases in this group. It also implies that firms hoard more cash as they mature. Therefore, the findings partly support hypothesis (i): the positive relationship can be observed in the moderate and high (RE/TA) group, but not in the low (RE/TA) group.
In order to test the second hypothesis, interaction terms are added to the model. The regression model in column 2 of Table 6 adds an interaction term between non-dividend paying firms and firms with low (RE/TA) ratios. The coefficient is positive (0.005) and statistically significant (t-statistic = 2.46), reflecting that not paying dividends affects the relationship between firms with low (RE/TA) ratios and their corporate cash holdings. Thus, not paying dividends strengthens the relationship between young firms and their cash ratios. In column 3 of Table 6, the regression model adds an interaction term between dividend paying firms and firms with high (RE/TA) ratios. The estimated coefficient of the interaction term is positive (0.017) and significant (t-statistic = 1.88) which implies that paying dividends also affects the relationship between firms with high (RE/TA) ratios and their corporate cash holdings. In particular, paying firms strengthen the relationship between mature firms and their cash ratios and thus fully support hypothesis (ii).
In addition, the relationships between corporate cash holdings and a country’s legal aspects (IPR protection and legal origin) are investigated. The multiple OLS regression framework also uses the cash ratio as dependent variable. The following two hypotheses are tested: (iii) whether there is a negative relationship between corporate cash holding levels and firms who experienced a positive IPR reform and (iv) whether there is a negative relationship between corporate cash holdings levels and firms in common law countries.
29
difference in difference estimation analyzes the average effect of IPR reforms on corporate cash holdings of firms in countries who experienced an increase or a decrease in IPR protection over the sample period. It shows the differential change in cash ratios over time by comparing the outcome of the treatment group (i.e. countries with an increase or decrease in IPR protection over the sample period) to the outcome of the control group (i.e. countries who did not experience the increase or decrease in IPR protection over the sample period). Columns 4-5 of Table 7 report the results of the difference in difference approach. Column 4 focuses on the differential in cash ratios where the treatment group experienced a positive IPR reform in the sample period. The differential change over time between the treatment group and the control group is negative (-0.016) and high statistically significant (-9.54). This implies that the cash ratios of firms in countries who experienced a positive IPR reform (the treatment group) decreased when compared to the cash ratios of firms in countries who did not experience a positive IPR reform (the control group). Column 5 focuses on the differential change in cash ratios where the treatment group experienced a negative IPR reform in the sample period. The differential change during the sample period between the treatment group and the control group shows to be positive (0.007) and highly statistically significant (t - statistics = 3.87). This infers that the cash ratios of firms in countries who experienced a negative IPR reforms (the treatment group) increased as opposed to countries who did not experience the negative IPR reform (the control group). Thus, the findings fully support hypothesis (iii): there is a negative relationship between corporate cash holding levels and firms who experienced a positive IPR reform.
The fourth hypothesis is tested by adding a binary variable to the regression model which analyzes the unique relationship between corporate cash holdings and the legal origin of a country. The binary variable either takes the value of 1 or 0 depending on the legal origin of the country (common law = 1; civil law = 0). Column 6 of Table 7 reports the results. The estimated coefficient is positive (0.014) and statistically not significant. This means that corporate cash holding levels of firms in common law countries are similar to those in civil law countries. Therefore, the findings do not support hypothesis (iv).
.
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Table 6 Regression results with life-cycle variable
This table reports the regions results over the sample period January 2010 – December 2015. The dependent variable in this framework is the Cash Ratio: cash and short-term investments / total assets. Column one shows the unique relationship between corporate cash holdings and the life-cycle variable (RE/TA) when it is categorized according to its low, moderate, or high (RE/TA) ratio. Column two adds an interaction term (Low RE/TA * Non-Payer) in order to examine the moderating impact of not paying dividends on the relationship between young firms and their cash ratios. Columns three adds an interaction term (High RE/TA * PAYER) in order to investigate the moderating impact of paying dividends on the relationship between mature firms and their cash ratios. The explanatory variables of the models are: Low RE/TA, Moderate RE/TA, and High RE/TA Group: retained earnings / total assets ratio of the bottom 30%, next 40%, and top 30% of the sample, Payer and Non-Payer: binary variable indicating whether the firm pays dividends or not, Capex: capital expenditures / total assets, R&D: research & development expenditures / total sales, Leverage: (debt in current liabilities + long-term debt) / total assets, NWC: (current assets – current liabilities – cash and short-term investments) / total assets, Firm Size (log): natural logarithm of total assets, Profitability: net income / total assets, Tangibility: property, plant and equipment / total assets, GDP Growth: annual GDP growth in percentages of a country, GDP per Capita: natural logarithm of GDP per capita in USD, Regulatory Quality and Control of Corruption: two of the six dimensions of the World Governance Indicator index which proxy for country governance performance. The t-statistics are provided in brackets below the estimated coefficients and standard errors are clustered by country. *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels, respectively.
Dependent variable (1) (2) (3)
Cash Ratio Cash Ratio Cash Ratio
Constant 0.162** (2.34) 0.167** (2.42) 0.167** (2.44) Firm-Level
Low RE/TA Group -0.011***
(-7.43)
-0.017*** (-8.27)
-0.014*** (-9.22)
Moderate RE/TA Group 0.017*** 0.011*** 0.013***
(8.06) (5.12) (6.14)
High RE/TA Group 0.073*** 0.067*** 0.057***
(15.31) (13.76) (6.72) Payer -0.003*** -0.003*** (-2.59) (-3.00) Non-Payer 0.000 (0.06) Low RE/TA*Non-Payer 0.005** (2.46) High RE/TA*PAYER 0.017* (1.88) Capex 0.061*** 0.060*** 0.060*** (7.45) (7.33) (7.35) R&D 0.088*** 0.089*** 0.089*** (32.94) (33.14) (33.13) Leverage -0.200*** -0.204*** -0.204*** (-53.92) (-55.07) (-55.04) NWC -0.143*** -0.138*** -0.138*** (-42.74) (-41.24) (-41.19)
Firm Size (log) -0.009*** -0.010*** -0.010***
(-12.13) (-12.61) (-12.58) Profitability 0.018*** 0.016*** 0.016*** (5.77) (5.12) (5.17) Tangibility -0.251*** -0.250*** -0.250*** (-74.16) (-73.65) (-73.73) Country-Level GDP Growth 0.012 0.012 0.012 (0.67) (0.68) (0.67) GDP per Capita 0.000 0.000 0.000 (1.14) (1.13) (1.15) Regulatory Quality 0.107 0.105 0.107 (1.21) (1.22) (1.24) Control of Corruption -0.090 -0.085 -0.087 (-1.14) (-1.12) (-1.15)
Industry dummy Yes Yes Yes
Country dummy Yes Yes Yes
Year dummy Yes Yes Yes
No. of observations 185623 185623 185623
31
Table 7 Regression results with IPR reform and legal origin
This table reports the regression results over the sample period January 2010 – December 2015. The dependent variable in this framework is the Cash Ratio: cash and short-term investments / total assets. Columns one and two present the relationship between corporate cash holdings and intellectual property rights by using a difference in difference estimation technique. Treatment (+/-) are binary variables indicating whether the IPR reform increased/decreased IPR protection in a country during the sample period, Post is a binary variable indicating whether the IPR reform has taken place or not, Treatment (+/-) * Post indicates the differential changes in cash ratios between the treatment group and the control group. Column three shows the unique relationship between corporate cash holdings and the legal origin of a country. Common law is a binary variable. The explanatory variables of the models are: Payer: binary variable indicating whether a firm pays dividend or not, Capex: capital expenditures / total assets, R&D: research & development expenditures / total sales, Leverage: (debt in current liabilities + long-term debt) / total assets, NWC: (current assets – current liabilities – cash and short-term investments) / total assets, Firm Size (log): natural logarithm of total assets, Profitability: net income / total assets, Tangibility: property, plant and equipment / total assets, GDP Growth: annual GDP growth in percentages of a country, GDP per Capita: natural logarithm of GDP per capita in USD, Regulatory Quality and Control of Corruption: two of the six dimensions of the World Governance Indicator index which proxy for country governance performance. The t-statistics are provided in brackets below the estimated coefficients and standard errors are clustered by country. *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels, respectively.
Dependent variable (4) (5) (6)
Cash Ratio Cash Ratio Cash Ratio
Constant 0.137* (1.79) 0.154** (2.39) 0.174** (2.22) Firm-Level Treatment (+) -0.028 (-0.69) Post 0.007*** (7.31) Treatment (+) * Post -0.016*** (-9.54) Treatment (-) 0.078 (1.40) Post 0.002** (2.29) Treatment (-) * Post 0.007*** (3.87) Common Law 0.014 (0.30) Payer -0.001 -0.002 -0.002 (-0.92) (-1.48) (-1.41) Capex 0.058*** 0.060*** 0.059*** (7.09) (7.24) (7.16) R&D 0.089*** 0.089*** 0.089*** (33.36) (33.33) (33.33) Leverage -0.210*** -0.210*** -0.210*** (-57.18) (-57.18) (-57.17) NWC -0.138*** -0.138*** -0.138*** (-41.18) (-41.19) (-41.20)
Firm Size (log) -0.011*** -0.011*** -0.011***
(-14.71) (-14.60) (-14.56) Profitability 0.016*** 0.016*** 0.016*** (4.98) (5.06) (5.01) Tangibility -0.249*** -0.250*** -0.250*** (-73.16) (-73.26) (-73.26) Country-Level GDP Growth 0.013 0.004 0.012 (0.88) (0.31) (0.60) GDP per Capita 0.000 0.000 0.000 (1.62) (1.53) (1.09) Regulatory Quality 0.120 0.191** 0.066 (1.58) (2.25) (0.54) Control of Corruption -0.103 -0.141** -0.060 (-1.58) (-2.40) (-0.63)
Industry dummy Yes Yes Yes
Country dummy Yes Yes Yes
Year dummy Yes Yes Yes
No. of observations 185623 185623 185623
32 5.4 Robustness check
In order to verify the robustness of the empirical results concerning the life-cycle theory of dividends, an additional analysis is performed in which the findings of this study are compared to the findings of Baker et al. (2018). I use consolidated firm-level data from the Compustat database in order to examine the relationship between dividend payout policy and the life-cycle variables across 47 countries. By using consolidated data, the empirical results make inferences about the company group as a single economic entity. Using consolidated data may impact the robustness of the empirical results of this study considering it includes data from business entities affiliated with the parent company that do not necessarily reside in the same country as the parent company. Baker et al. (2018) investigate the relationship between dividend payout policy and the life-cycle variables using a sample of publicly listed Swedish firms. They hand-collect their data using annual reports over the period 2000 to 2016. The data on the firm-specific variables are then analyzed from the parent company only.
First of all, this study uses the two-step approach of Baker et al. (2018) to calculate the median value of the life-cycle variables and firm characteristics of dividend and non-dividend paying firms (Table 3 panel B). All values are first measured per calendar year and then computed across the sample period (2010-2015). The results are comparable to the findings of Baker et al. (2018). First, the earned equity to total common equity (RE/TE) and the earned equity to total assets (RE/TA) of dividend paying firms is higher than the (RE/TE) and (RE/TA) of non-dividend paying firms. Moreover, the common equity to total assets (TE/TA) of non-dividend paying firms is higher than the (TE/TA) of dividend paying firms. Next, dividend paying firms are more profitable than dividend paying firms. Finally, dividend paying firms are larger than non-dividend paying firms. Thus, these results also indicate preliminary support for the life-cycle theory of dividends: non-dividend paying firms (i.e. young firms) have low values of earned equity to total common equity (RE/TE), have low profitability, and are small in size. On the other hand, dividend paying firms (i.e. mature firms) have higher values of earned equity to total common equity (RE/TE), are more profitable, and are larger in size.
