Investor protection and resource allocation: International evidence

Yuan Huang, Xiao Li and K.C. John Wei

International Review of Economics & Finance, 2021, vol. 75, issue C, 625-645

Abstract: We use a multi-period equation system to examine how international manufacturing firms allocate internally generated operating cash flow to different uses. With one dollar increase in operating cash flow, firms use about half to reduce external financing and about a quarter to increase cash balances. Another quarter or so is spent on investment and only a tiny portion is paid out as dividends. Furthermore, firms in countries with strong investor protection save less out of operating cash flow and retire more external financing, especially the equity. Additional analysis reveals that the cost of equity capital is lower in firms retiring more external funds and/or saving less. Our study provides a new perspective to evaluate the fund allocation decisions of international firms.

Keywords: Fund allocation; Cash flow sensitivities; Investor protection; International finance (search for similar items in EconPapers)
JEL-codes: G15 G32 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:75:y:2021:i:c:p:625-645

DOI: 10.1016/j.iref.2021.04.017

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