How does the value of corporate cash holdings depend on corporate governance? : a cross-country analysis

Abstract

The objective of this thesis is to quantitatively test how corporate governance influences the value of corporate cash holdings. More specifically, we examine whether valuation of corporate cash holdings is consistent with agency theory. To perform the analysis, we employ the methods used by Pinkowitz, Stulz and Williamson (2006). The sample data is hand collected from the Worldscope database and consists of 727,681 unique firm years. After the dataset was trimmed it finally consisted of 99,079 firm years. Based on these observations, we obtain our results using regression analysis. The analysis investigates two hypotheses: 1. Cash is valued at a discount in countries with weak investor protection. 2. Dividends contribute more to firm value in countries with weaker investor protection. We split the sample data into high investor protection and low investor protection countries, based on seven different proxies for investor protection, to investigate the differences between the low protection and high protection group. The results of our analysis provide strong support for hypothesis 1. However, they do not provide any support for hypothesis 2.