Cash holding and control-oriented finance

Ronald W. Anderson and Malika Hamadi

Journal of Corporate Finance, 2016, vol. 41, issue C, 410-425

Abstract: We critically reassess the notion that high liquid asset holding by firms faced with weak investor protection is evidence of managerial rent extraction. We show that firms facing agency problems may establish tight controls over management through concentrated ownership. Using data on Belgian listed firms between 1991 and 2006, we find a strong positive association between ownership concentration and cash holding. This indicates a precautionary motive on the part of the controlling shareholders who highly value control. We also find that firm market valuation is positively affected by the amount of cash held by firms. On the other hand, managerial ownership has no impact. These results are consistent with the hypothesis that firms' owners are pursuing a rational strategy to mitigate agency costs in the face of weak investor protections.

Keywords: Cash holding; Ownership concentration; Investor protection; Control-oriented finance; Family firms (search for similar items in EconPapers)
JEL-codes: G30 G32 G34 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:41:y:2016:i:c:p:410-425

DOI: 10.1016/j.jcorpfin.2016.10.009

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