Financial crisis, shareholder protection and cash holdings

Journal Pre-proof FINANCIAL CRISIS, SHAREHOLDER PROTECTION AND CASH HOLDINGS Quoc Trung Tran

PII:

S0275-5319(19)30721-4

DOI:

https://doi.org/10.1016/j.ribaf.2019.101131

Reference:

RIBAF 101131

To appear in:

Research in International Business and Finance

Received Date:

20 June 2019

Revised Date:

14 November 2019

Accepted Date:

16 November 2019

Please cite this article as: Tran QT, FINANCIAL CRISIS, SHAREHOLDER PROTECTION AND CASH HOLDINGS, Research in International Business and Finance (2019), doi: https://doi.org/10.1016/j.ribaf.2019.101131

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FINANCIAL CRISIS, SHAREHOLDER PROTECTION AND CASH HOLDINGS Quoc Trung Tran1 1

Foreign Trade University, Ho Chi Minh City Campus, Ho Chi Minh City, Vietnam

Corresponding author: Quoc Trung Tran, Ho Chi Minh City Campus, Foreign Trade University, 15 D5 Street, Ward 25, Binh Thanh District, Ho Chi Minh City, Vietnam. Tel: +84 909 574 029. E-mail: [email protected].

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Graphical abstract

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Abstract: In this paper, I investigate the relationship between shareholder protection and corporate cash holdings under the impact of the global financial crisis. With a sample of 192,807 observations across 40 countries during the

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period 2002 - 2015, I find that the global financial crisis mitigates the controlling effect of shareholder protection on corporate cash holdings. In addition, this mitigating role is stronger in financially constrained firms. Overall, the

financial crisis.

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results suggest that managers are more likely to expropriate shareholders through corporate liquidity policy during a

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Keywords: Financial crisis; Shareholder protection; Cash holdings; Corporate governance.

JEL Classification Code: G34

1. Introduction

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According to agency theory, there is a conflict of interest between shareholders and managers since corporate

control and ownership are separated (Jensen, 1986; Jensen & Meckling, 1976; Rozeff, 1982). Corporate managers tend to save more cash to over-invest in unprofitable business projects in order to serve their personal benefits (Jensen, 1986). Recognizing this behavior, shareholders may take advantage of shareholder rights to force managers to disgorge cash. The extant literature shows that legal protection of shareholders is an effective channel to reduce agency problems in corporate dividend policy (Brockman & Unlu, 2009; La Porta, Lopez-De-Silanes, Shleifer, & Vishny, 2000; Shao, Kwok, & Guedhami, 2013). Moreover, Dittmar, Mahrt-Smith, and Servaes (2003) and Iskandar-Datta

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and Jia (2014) also find that shareholder rights affect agency motive of corporate cash holdings. However, they explain the relationship between shareholder protection and cash holdings with two opposite mechanisms. On one hand, convenience mechanism states that the effect of shareholder protection on cash reserves is negative (Dittmar et al., 2003). Although excessive cash leads to inefficient asset management, firm managers still prefer cash holdings since cash is more convenient than other assets (Easterbrook, 1984). Managers in countries of poor shareholder rights are less controlled by shareholders and thus they tend to accumulate more cash. On the other hand, empire building mechanism argues that shareholder protection is positively related to corporate cash holdings (Iskandar-Datta & Jia, 2014). Corporate managers are likely to grow their firms beyond the optimal size in order to build their own empire (Hope & Thomas, 2008; Jensen, 1986; Jensen & Meckling, 1976; Masulis, Wang, & Xie, 2007). When shareholder

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rights are weaker, managers face lower pressure to disgorge excessive cash from shareholders and thus they quickly transform cash into overinvestment in unprofitable projects. Therefore, firms in countries of poor shareholder protection have lower cash holdings.

While these prior studies investigate the relationship between shareholder rights and corporate cash reserves

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in a static environment, this paper examines this relationship under the impact of an exogenous shock to corporate governance. I posit that the global financial crisis decreases available return on investment and thus marginal costs of

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shareholder expropriation is lower. Johnson, Boone, Breach, and Friedman (2000); Lemmon and Lins (2003); Mitton (2002); Tran, Alphonse, and Nguyen (2017) find that agency problem between shareholders and managers is more

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severe under the impact of a financial crisis. According to convenience (empire-building) mechanism, the negative (positive) effect of shareholder protection on cash reserves is weaker (stronger) when managers have higher incentives

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to expropriate shareholders over the crisis period. Therefore, I hypothesize that the global financial crisis decreases the controlling effect of shareholder rights on corporate cash holdings regardless of agency mechanism. With a sample of 192,807 observations across 40 countries, I find supporting evidence for this hypothesis. Moreover, Almeida, Campello, and Weisbach (2004); Song and Lee (2012) find that financially constrained firms are likely to save more cash. Consequently, I extend my research with the argument that managers may take

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advantage of their firms’ financial constraint to expropriate shareholders over the crisis period. Based on three different measures (i.e. Whited and Wu (2006) index, firm size and firm leverage), I divide the full sample into two groups including financially unconstrained and constrained firms. Then, I investigate how the financial crisis influences the controlling effect of shareholder protection on corporate cash holdings by levels of financial constraint. My research findings show that the role of the financial crisis is more announced in financially constrained firms. This paper contributes to the literature on agency motive of corporate cash holdings. A financial crisis makes shareholder rights less effective in controlling managers’ expropriation of shareholders through corporate liquidity

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policy. Therefore, shareholders should make more efforts to monitor and control corporate managers during a financial crisis. The rest of this paper is organized as follows. Section 2 presents literature review and research hypotheses. Section 3 depicts research models and data collection. Section 4 reports descriptive statistics and regression results. Section 5 illustrates robustness checks and Section 6 presents main conclusions. 2. Literature review and hypotheses development The extant literature shows that firms hold cash to meet unpredicted contingencies and avoid transaction costs of external financing (Myers & Majluf, 1984; Ozkan & Ozkan, 2004; Phan, Nguyen, Nguyen, & Hegde, 2019). However, managers may also use corporate liquidity to serve own benefits instead of maximizing shareholders’ wealth if they are not monitored effectively (Jensen, 1986). There are two opposite agency-relevant hypotheses of corporate

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cash holdings namely convenience hypothesis and empire-building hypothesis. The former argues that firms with large cash holdings are convenient and free from scrutiny of capital markets (Easterbrook, 1984); therefore, they experience lower probability of financial distress. When controlling shareholders prefer the convenience of cash holdings, firms in countries of weak shareholder protection tend to stockpile cash. Consequently, there is a negative

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relationship between shareholder rights and corporate cash reserves. Jebran, Chen, and Tauni (2019) show that cash holdings are a means to expropriate minority shareholders in China. In addition, Dittmar et al. (2003) posit that

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investors in countries of weak shareholder rights cannot pressure managers to disgorge excessive corporate liquidity. With a research sample including about 11,000 firms in 45 countries, they find a negative relationship between anti-

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director rights index developed by La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1998) and corporate cash holdings. Pinkowitz, Stulz, and Williamson (2006) examine how cash holdings affect firm value with a data of 75,887

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firm years from 12,339 unique firms around the world and document that this relationship is much weaker in countries of poor shareholder protection. Using managerial control rights data from 5,000 firms across 31 countries, Kalcheva and Lins (2007) find that firms with more cash reserves are valued lower in countries of weak external shareholder protection. Besides, Dittmar and Mahrt-Smith (2007) compare firm value and cash holdings in weakly- and wellgoverned firms to analyze effects of corporate governance on firm value. Their findings show that corporate

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governance has a significant effect on firm value via its effect on cash holdings. Poorly-governed firms dissipate cash in ways that considerably decrease operating performance. Moreover, the negative relationship between large cash holdings and future performance is mitigated when firms are well-governed. Chang and Noorbakhsh (2006, 2009) also find that firms in countries of the Common law system and higher anti-director rights index (La Porta et al., 1998) are likely to have a smaller percentage of cash and equivalents in their corporate assets. This implies that shareholder rights are negatively related to corporate cash holdings.

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On the contrary, empire-building hypothesis posits that firms in countries of weak shareholder rights have low levels of cash. According to agency theory, managers prefer using firm resources to build their own empire by expanding firm size beyond its optimal level, developing new plants and acquiring new companies for prestige, power, status, compensation and personal benefits (Jensen, 1986; Jensen & Meckling, 1976). Hope and Thomas (2008); Masulis et al. (2007) also find empirical supporting evidence for managers’ empire-building incentives. According to Iskandar-Datta and Jia (2014), although many prior studies document the negative relationship between the original anti-director rights index from La Porta et al. (1998) and corporate cash holdings, this relationship should be revised because of two problems: coding mistakes in the original anti-director rights index (Spamann, 2010) and small samples. Using a research data of 115,945 firm-years from 18,192 firms across 41 countries over the period 1996 –

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2008, they find indices of both corrected and revised anti-director rights are positively related to corporate cash holdings. These findings indicate that the empire building hypothesis is supported.

Regardless of the debatable relationship between shareholder protection and corporate cash reserves in prior research, I find that these studies are conducted in a static environment only. Therefore, this paper examines this

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relationship under an exogenous shock that may change agency costs of shareholders. Lian, Sepehri, and Foley (2011) argue that firms are likely to save more cash during the global financial crisis due to precautionary motive. Cash is a

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buffer for uncertainty when the crisis makes capital markets fail to function efficiently and bank financing dry up. With a sample of 8,663 observations from Chinese firms over the period from 1999 to 2009, they document that firms

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are precautious with their cash holdings under the impact of the financial crisis. Akbar, Rehman, Liu, and Shah (2017); Jebran, Iqbal, Bhat, Khan, and Hayat (2019); Shiau, Chang, and Yang (2018); Xu, Li, Li, and Liu (2019) also find

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consistent evidence in Taiwan, Pakistan and the UK. While many prior studies find that firms tend to save more cash over a financial crisis due to precautionary motive, this paper examines how the global financial crisis affects agency motive of corporate cash holdings. According to Johnson et al. (2000), the available return on investment is decreased by a financial crisis and mangers incur lower marginal costs of misallocating firm resources to serve their own interest. As a result, a financial crisis leads to more server shareholder expropriation. Investigating corporate governance in 25

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emerging markets affected by the Asian financial crisis, Johnson et al. (2000) find that there is more expropriation by managers in countries with poor protection of minority shareholders during the crisis period and thus these countries experience larger decreases in asset prices. In addition, Lemmon and Lins (2003) find that the Asian financial crisis affects corporate investment opportunities negatively and raises managers’ incentives to expropriate minority investors. Mitton (2002) also show that individual firms can deter expropriation of minority shareholders during the crisis period from 1997 to 1998 when legal protection of shareholders is inadequate. Recently, Tran et al. (2017) consider the global financial crisis as an exogenous shock to investigate effects shareholder protection on dividend

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policy. They find that shareholder rights become less effective in dividend policy during the post-crisis period. Motivated by these prior studies, I argue that if convenience (empire-building) mechanism dominates corporate cash holdings, the negative (positive) effect of shareholder protection on corporate cash holdings is weaker (stronger) during the global financial crisis. As a result, the controlling effect of shareholder protection on corporate cash reserves is weaker during the crisis period regardless of agency mechanism. H1: The controlling effect of shareholder protection on corporate cash reserves is weaker over the crisis period. 3. Research methods 3.1. Research model In line with Dittmar et al. (2003); Iskandar-Datta and Jia (2014), I develop a research model in which corporate

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cash holdings are a function of both firm characteristics and country-specific variables. In order to investigate the relationship between shareholder protection and firm cash holdings during the crisis period, I add an interactive term between shareholder protection and crisis dummy to the model as follows.

Cash_TAt =  + 1CRI*RAD + 2CRI + 3RAD + 4CFt + 5NWCt + 6TOBt + 7LEVt + 8TANt + 9CAPt

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+ 10SIZt + 11DIVt + + 12CRE + 13UA + 14ID +15MA +16PD +17Private_creditt + 18Market_capt +

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19GDP_capitat + 20GDP_growtht + Industry dummies +  (1)

Where the dependent variable is cash to assets ratio (Cash_TA). Besides, I also use the natural logarithm of cash to assets ratio, cash to sales ratio and the the natural logarithm of cash to sales ratio for robustness checks1. Firm-

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level variables include cash flow (CF), net working capital (NWC), asset growth (GTA), Tobin’s Q (TOB), leverage (LEV), tangibility (TAN), capital expenditure (CAP), firm size (SIZ) and dividend payment dummy (DIV). Country-

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level variables consist of crisis dummy (CRI), shareholder protection index (RAD), creditor protection index (CRE), uncertainty avoidance culture (UA), individualism (ID), masculinity (MA), power distance (PD), private credit (Private_credit), market capitalization (Market_cap), GDP per capita (GDP_capita) and GDP growth (GDP_growth). Definitions of these key research variables are presented in Table 1. The coefficient of the interaction between

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shareholder protection index and crisis dummy is expected to be positive. I employ pooled OLS regression to estimate Equation (1). Standard errors are clustered by firms to control

within-firm correlated residuals. Table 1. Definitions of key research variables Variables Cash_TA

Name Cash to assets ratio

Definitions (Cash + Short-term investment)/(Total assets – Cash – Short-term investment)

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Natural logarithms of cash to net assets ratio and cash to net sales ratio are employed instead of their original values since they are highly skewed.

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Cash to sales ratio

(Cash + Short-term investment)/(Net sales – Cash – Short-term investment)

CRI

Crisis dummy

1 for the crisis period from 2008 to 2009 and 0 otherwise

RAD

Revised anti-director rights index

Revised anti-director rights index developed by Djankov, La Porta, Lopez-de-Silanes, and Shleifer (2008)

CRE

Revised creditor rights index

Revised creditor right index developed by Djankov, McLiesh, and Shleifer (2007).

CF

Cash flow

(Earnings before depreciation – Interest – Taxes – Common dividends)/ (Total assets – Cash – Short-term investment)

NWC

Net working capital

(Net working capital – Cash – Short-term investment)/(Total assets – Cash – Short-term investment)

TOB

Tobin’s Q

(Market value of equity + Book value of liabilities)/(Total assets – Cash – Short-term investment)

LEV

Leverage

Total liabilities/(Total assets – Cash – Short-term investment)

TAN

Tangibility

Property, plant and equipment/(Total assets – Cash – Short-term investment)

CAP

Capital expenditure

Capital expenditure/(Total assets – Cash – Short-term investment)

SIZ

Firm size

Natural logarithm of Total assets in US dollars

DIV

Dividend payment

1 for payers and 0 otherwise

UA

Uncertainty avoidance

Uncertainty avoidance dimension of national culture from Hofstede, Hofstede, and Minkov (2010)

ID

Individualism

Individualism dimension of national culture from Hofstede et al. (2010)

MA

Masculinity

Masculinity dimension of national culture from Hofstede et al. (2010)

PD

Power distance

Power distance dimension of national culture from Hofstede et al. (2010)

Private_credit

Private credit

Market_cap

Market capitalization

Market capitalization scaled by GDP

GDP_capita

GDP per capita

Natural logarithm GDP per capita in US dollars

GDP_growth

GDP growth

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Cash_SA

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Domestic credit to private sector by banks scaled by GDP

Annual GDP growth rate

3.2. Research data

I construct the research data from Compustat Global and Compustat North America. Selected firms are

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incorporated in countries listed by La Porta, Lopez-De-Silanes, and Shleifer (2006). Firm-years are eliminated if they meet the following criteria: (1) financial sector and utilities industry (Fama & French, 2001); (2) multiple issues of common equity (Ferris, Jayaraman, & Sabherwal, 2009); (3) unconsolidated financial statements (Mahajan & Tartaroglu, 2008); (4) incomplete information, (5) abnormal information including negative book equity and negative

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total assets. The final research sample consists of 204,925 observations from 28,070 firms in 40 countries between 2002 and 20152. All firm-specific variables are winsorized at 3% to mitigate outlier effects3. 4. Research results 4.1. Descriptive statistics Table 2 presents summary description of the research data. Panel A shows that cash holdings to assets ratio ranges from 0.3% to 90.8%. Its mean and median are 18.8% and 11.1% respectively. However, cash holdings to assets ratio is highly skewed since its mean (30.6%) is much higher than its median (12%). On average, cash flow is equivalent to 27.4% of net assets and leverage is 61.1%. Dividend payers constitute 46.4% of the sample. In addition, Panel B reports the distribution of firms by year. Total amount of observations in the crisis period accounts for 15.7%

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of the full sample.

Furthermore, Panel C illustrates number of firm-years by industry. A majority of observations in the research data is from Manufacturing. This industry constitutes about 56% of the full sample, followed by Service industries. Construction industries have the smallest number of firm-years with 7,069. Besides, Panel D shows that number of

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observations varies significantly across countries. US composes the largest percentage of the research sample with 39,059 firm-years (20.3%), followed by Japan with 30,300 firm-years (15.7%). This sample composition problem

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appears in many prior cross-country studies regardless of data sources.

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I conduct this study in the 2002 – 2015 period due to two reasons: (1) It contains the global financial crisis period 2008 – 2009 and (2) I may avoid the effect of the Asian financial crisis on my results. 3 I also replicate all regression models with 5% and 10% winsorized samples and find that key research findings persist.

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Table 2. Summary of statistics Cash_TA is cash to assets ratio. Cash_SA is cash to sales ratio. NWC is net working capital. TOB is Tobin’s Q. LEV is firm leverage. TAN is tangibility. CAP is capital expenditure. SIZ is firm size. DIV is dividend payment dummy. RAD is revised anti-director rights index developed by Djankov et al. (2008). IPR is investor protection index developed by La Porta et al. (2006). ADI is original creditor rights index developed by La Porta et al. (1998). LO is legal origin assigned 1 for Common law and 0 otherwise. CRE is revised creditor right index developed by Djankov et al. (2007).

SD 0.215 0.502 0.373 0.221 1.746 0.261 0.230 0.057 1.966 0.499

1st quartile 0.042 0.044 0.071 -0.092 1.000 0.425 0.144 0.017 10.868 0.000

3rd quartile 0.245 0.306 0.467 0.168 2.133 0.757 0.497 0.077 13.507 1.000

Min 0.003 0.003 -0.655 -0.570 0.623 0.178 0.018 0.002 8.220 0.000

Max 0.908 2.379 1.189 0.446 8.844 1.347 0.848 0.238 16.378 1.000

Panel B. Annual number of firms Year N Year 2002 8,505 2006 2003 10,845 2007 2004 11,599 2008 2005 12,614 2009

N 13,600 14,613 14,789 15,395

Year 2010 2011 2012 2013

N 15,575 16,029 15,640 15,200

Year 2014 2015

N 14,620 13,783

Panel C. Industry Distribution Industry 2‐digit SIC Mineral industries 10-14 Construction industries 15-17 Manufacturing 20-39

N 9,956 7,069 108,257

2‐digit SIC 50-51 52-59 >=70

N 10,004 10,261 34,305

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Panel D. Country-specific data No. Country No. firms obs Argentina 406 39 Australia 6,392 694 Austria 559 54 Belgium 766 73 Brazil 1,921 203 Canada 7,744 840 Switzerland 1,731 158 Chile 874 97 China 17,925 1,806 Germany 4,565 472 Denmark 658 75 Spain 900 96 Finland 1,045 103 France 5,113 481

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Industry Wholesale trade Retail trade Service industries

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Transportation, communications

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Panel A. Firm‐specific data Variables Mean Median Cash_TA 0.188 0.111 Cash_SA 0.306 0.120 CF 0.274 0.246 NWC 0.024 0.034 TOB 1.975 1.349 LEV 0.611 0.590 TAN 0.340 0.311 CAP 0.057 0.038 SIZ 12.210 12.158 DIV 0.464 0.000

12,955

Cash_TA

RAD

IPR

ADI

LO

0.095 0.179 0.175 0.141 0.172 0.136 0.212 0.088 0.227 0.209 0.132 0.113 0.159 0.186

2 4 2.5 3 5 4 3 4 1 3.5 4 5 4 3.5

0.479 0.784 0.104 0.068 0.442 0.959 0.304 0.610

4 4 2 0 3 5 2 5

0.000 0.363 0.553 0.465 0.473

1 2 4 3 3

1 1 0 1 0 1 0 0 0 0 0 0 0 0

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781 209 94 279 1,788 35 225 168 2,546 1,027 77 694 123 137 64 181 61 99 310 40 475 258 390 134 3,909 142

5 2 5 4 5 5 4 2 4.5 4.5 3 5 3 3.5 4 4 4 4 2 2.5 5 3.5 4 3 3 5

0.776 0.319 0.851 0.507 0.769 0.478 0.594 0.197 0.417 0.358 0.098 0.729 0.537 0.436 0.465 0.625 0.656 0.812

5 2 5 2 5 4 3 1 4

0.574 0.770 0.386 0.373 0.338 1.000 0.599

3 4 3 2 2 5 5

1 4 2 4 4 5 3 3

1 0 1 0 1 1 1 0 0 0 0 1 0 0 1 1 0 0 0 0 1 0 1 0 1 1

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4.2. Regression results

0.170 0.086 0.233 0.136 0.101 0.229 0.233 0.123 0.227 0.187 0.107 0.166 0.134 0.176 0.090 0.119 0.095 0.150 0.120 0.074 0.245 0.173 0.137 0.122 0.226 0.164

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7,596 2,067 1,019 2,784 15,199 321 1,818 1,504 30,300 8,912 797 7,317 1,302 1,268 540 1,713 568 905 2,725 432 4,735 2,222 4,349 1,260 39,059 1,496

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UK Greece Hong Kong Indonesia India Ireland Israel Italy Japan South Korea Mexico Malaysia Netherlands Norway New Zealand Pakistan Peru Philippines Poland Portugal Singapore Sweden Thailand Turkey US South Africa

Table 3 reports regression results with four alternative measures of cash holdings to investigate how

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shareholder protection influences corporate cash reserves during the financial crisis. I find that the interaction between crisis dummy and shareholder protection index is positively related to corporate cash holdings. In addition, I also

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present the interaction plot for the regression model in which the dependent variable is Cash_TAt in Appendix 1 and this plot shows a consistent result. Consistent with Johnson et al. (2000); Lemmon and Lins (2003); Tran et al. (2017), these findings imply that the global financial crisis reduces available investment return and thus managers have higher incentives to expropriate shareholders through corporate liquidity policy. Over the crisis period, regardless of the effective agency mechanism (the convenience mechanism or the empire-building mechanism), the controlling effect

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of shareholder rights on corporate cash holdings is weaker. In addition, I document that shareholder rights are negatively associated with corporate cash holdings. This result supports the convenience mechanism (Dittmar et al., 2003). When shareholder protection is weak, managers are more likely to expropriate shareholders by accumulating more cash. Besides, in line with Acharya, Amihud, and Litov (2011); Djankov et al. (2007), I find a negative relationship between creditor rights and corporate cash reserves. Strong creditor rights mitigate the creditor-debtor agency problem and thus increase the availability of credit. Firms having higher availability of credit are less likely to save cash.

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Moreover, I find that operating cash flow is positively associated with cash reserves. Firms accumulate cash out of operating cash flows; therefore, they tend to save more cash when their cash flow is higher (Almeida et al., 2004). Net working capital negatively affects corporate cash holdings since it is considered as a substitute of cash reserves (Lian et al., 2011). In line with Bates, Kahle, and Stulz (2009); Ferreira and Vilela (2004); Hugonnier, Malamud, and Morellec (2014); Kim, Kim, and Woods (2011); Kim, Mauer, and Sherman (1998); Opler, Pinkowitz, Stulz, and Williamson (1999), I document that Tobin’s Q positively influences cash holdings respectively. Firms with high investment opportunities tend to save more cash to avoid transaction costs of external financing. Furthermore, asset tangibility and firm size are negatively related to corporate cash reserves. Firms with high asset tangibility and large size incur lower costs of external financing (Myers & Majluf, 1984); therefore, they are less likely to save cash.

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Firms paying dividends experience low external financial constraint and thus they are hold less cash. (Campello, Graham, & Harvey, 2010). Table 3. Financial crisis, shareholder protection and cash holdings

Cash_TA is cash to assets ratio. Cash_SA is cash to sales ratio. Ln(Cash_SA) is natural logarithm of cash to sales ratio. CRI is crisis dummy. RAD

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is revised anti-director rights index developed by Djankov et al. (2008). CF is cash flow to assets. NWC is net working capital. TOB is Tobin’s Q. LEV is firm leverage. TAN is tangibility. CAP is capital expenditure. SIZ is firm size. DIV is dividend payment dummy. CRE is revised creditor

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right index developed by Djankov et al. (2007). UA, ID, MA and PD are four cultural dimensions (i.e. uncertainty avoidance, individualism, masculinity and power distance) from Hofstede et al. (2010). Private_credit is private credit to GDP. Market_cap is market capitalization to GDP. GDP_capita is natural logarithm of GDP per capita. GDP_growth is annual GDP growth rate. *** is significant at 1%. ** is significant at 5%. * is

Variables

CRI RAD CFt

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NWCt TOBt LEVt TANt CAPt SIZt

Dependent variable is Cash_TAt 0.0024*** (4.75) 0.0018 (0.91) -0.0011** (-2.15) 0.5607*** (143.44) -0.5966*** (-106.46) 0.0137*** (22.54) 0.0591*** (20.41) -0.0731*** (-26.07) -0.0017 (-0.17) -0.0170***

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CRI*RAD

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significant at 10%. T-statistics are in parentheses.

Dependent variable is Ln(Cash_TAt) 0.0194*** (4.86) 0.0229 (1.53) -0.0448*** (-8.95) 2.7052*** (112.49) -2.8025*** (-69.94) 0.0617*** (18.64) 0.1779*** (7.40) -0.8173*** (-28.63) 1.1294*** (13.77) -0.0513***

Dependent variable is Cash_SAt 0.0163*** (7.12) -0.0507*** (-5.55) -0.0204*** (-8.96) 0.8023*** (68.08) -1.0131*** (-52.74) 0.0301*** (18.11) -0.2055*** (-17.04) -0.0585*** (-5.01) -0.1987*** (-5.62) -0.0057***

Dependent variable is Ln(Cash_SAt) 0.0404*** (8.02) -0.0803*** (-4.27) -0.0741*** (-11.23) 2.5227*** (95.92) -3.2452*** (-67.87) 0.0789*** (18.99) -0.6847*** (-21.16) -0.4272*** (-11.64) -0.0192 (-0.19) 0.0127***

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MA PD Private_creditt Market_capt GDP_capitat GDP_growtht Intercept Industry dummies R-squared N 5. Robustness checks

(3.44) -0.2328*** (-19.54) -0.0234** (-2.31) -0.0038*** (-9.75) -0.0089*** (-18.95) 0.0090*** (24.80) 0.0073*** (11.09) 0.0026*** (10.39) 0.0001 (0.78) 0.2067*** (22.64) 0.0024 (1.21) -4.4167*** (-32.94) Yes 0.4044 192,807

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ID

(-4.63) -0.0937*** (-23.80) -0.0052* (-1.76) -0.0013*** (-9.77) -0.0010*** (-6.58) 0.0016*** (13.82) 0.0013*** (6.50) 0.0005*** (5.98) 0.0001 (1.37) 0.0243*** (7.75) -0.0009 (-1.42) 0.0956** (2.36) Yes 0.3041 192,807

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UA

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CRE

(-18.00) -0.0334*** (-3.62) -0.0280*** (-3.56) -0.0026*** (-8.83) -0.0084*** (-23.81) 0.0087*** (31.83) 0.0028*** (5.72) 0.0014*** (7.29) -0.0002*** (-2.86) 0.2442*** (35.59) 0.0076*** (4.84) -4.9019*** (-46.55) Yes 0.5175 192,807

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DIVt

(-49.11) -0.0216*** (-21.71) -0.0065*** (-7.91) -0.0004*** (-13.63) -0.0006*** (-15.01) 0.0009*** (30.69) 0.0001* (1.67) 0.0001*** (2.85) 0.0000 (-1.22) 0.0216*** (29.67) -0.0003* (-1.71) 0.0253** (2.55) Yes 0.7125 192,807

5.1. Robustness checks with a reduced sample

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Like prior cross-country studies, this research may have biased results caused by unbalanced sample composition. As presented in Section 4, US and Japan constitute about 36% of observations in the research data; therefore, I present regression results for a reduced sample without US and Japanese firms as a robustness check. Table 4 shows that the interactive term between shareholder rights and crisis dummy is also positively related to all

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measures of corporate cash holdings. This implies that my research findings are stable regardless of unbalanced distribution of firms across countries.

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Table 4. Robustness checks with the reduced sample without US and Japan Cash_TA is cash to assets ratio. Cash_SA is cash to sales ratio. Ln(Cash_SA) is natural logarithm of cash to sales ratio. CRI is crisis dummy. RAD is revised anti-director rights index developed by Djankov et al. (2008). CF is cash flow to assets. NWC is net working capital. TOB is Tobin’s Q. LEV is firm leverage. TAN is tangibility. CAP is capital expenditure. SIZ is firm size. DIV is dividend payment dummy. CRE is revised creditor right index developed by Djankov et al. (2007). UA, ID, MA and PD are four cultural dimensions (i.e. uncertainty avoidance, individualism, masculinity and power distance) from Hofstede et al. (2010). Private_credit is private credit to GDP. Market_cap is market capitalization to GDP. GDP_capita is natural logarithm of GDP per capita. GDP_growth is annual GDP growth rate. *** is significant at 1%. ** is significant at 5%. * is significant at 10%. T-statistics are in parentheses.

RAD CFt NWCt TOBt LEVt

lP

TANt

SIZt DIVt CRE

Jo

UA

ur na

CAPt

ID

MA PD

Private_creditt Market_capt

Dependent variable is Cash_SAt 0.0180*** (7.10) -0.0638*** (-6.33) -0.0223*** (-7.71) 0.8300*** (55.87) -1.0095*** (-43.98) 0.0178*** (9.30) -0.1647*** (-11.07) -0.0447*** (-3.17) -0.0979** (-2.42) -0.0067*** (-4.48) -0.0846*** (-19.32) -0.0011 (-0.31) -0.0010*** (-6.74) -0.0011*** (-6.33) 0.0012*** (5.37) 0.0013*** (6.17) 0.0008*** (8.59) 0.0000 (1.05)

Dependent variable is Ln(Cash_SAt) 0.0501*** (9.11) -0.1273*** (-6.47) -0.0929*** (-10.53) 2.6653*** (79.52) -3.2676*** (-56.83) 0.0513*** (10.20) -0.5688*** (-14.00) -0.4264*** (-9.81) 0.2951*** (2.58) 0.0318*** (6.82) -0.2321*** (-17.54) 0.0072 (0.57) -0.0032*** (-7.87) -0.0080*** (-14.59) 0.0059*** (8.04) 0.0078*** (11.38) 0.0030*** (10.27) 0.0001 (1.10)

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CRI

Dependent variable is Ln(Cash_TAt) 0.0221*** (5.19) -0.0120 (-0.80) -0.0684*** (-10.62) 3.0195*** (94.89) -3.0249*** (-61.11) 0.0372*** (9.41) 0.3336*** (11.19) -0.8170*** (-24.56) 1.2314*** (13.63) -0.0273*** (-7.77) -0.0518*** (-5.16) 0.0251*** (2.62) -0.0018*** (-6.17) -0.0065*** (-16.03) 0.0037*** (6.84) 0.0040*** (8.07) 0.0019*** (8.90) -0.0001** (-2.09)

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CRI*RAD

Dependent variable is Cash_TAt 0.0027*** (5.46) -0.0040** (-2.19) -0.0010 (-1.56) 0.5827*** (123.43) -0.6189*** (-98.94) 0.0081*** (12.05) 0.0791*** (24.34) -0.0588*** (-19.89) -0.0179* (-1.84) -0.0146*** (-37.24) -0.0218*** (-21.66) -0.0020** (-2.14) -0.0002*** (-7.64) -0.0005*** (-11.89) 0.0005*** (9.72) 0.0001*** (2.61) 0.0003*** (11.34) 0.0000** (-2.56)

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Variables

12

GDP_capitat GDP_growtht Intercept Industry dummies R-squared N

0.0147*** (18.82) 0.0005*** (3.33) 0.0085 (0.79) Yes 0.7343 123,448

0.1946*** (26.49) 0.0114*** (6.70) -4.8473*** (-43.05) Yes 0.5317 123,448

0.0150*** (4.18) 0.0010 (1.48) -0.0286 (-0.63) Yes 0.2892 123,448

0.1716*** (16.89) 0.0085*** (3.88) -5.1646*** (-34.95) Yes 0.4088 123,448

5.2. Robustness checks with alternative measures of shareholder protection Prior research shows that there are various measures of shareholder rights. Consequently, I replace revised anti-director rights index by other measures of shareholder rights and present their regression results as robustness

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checks. I use three alternative measures of shareholder rights such as investor protection index from La Porta et al. (2006) and original anti-director index from La Porta et al. (1998) and legal origin dummy assigned 1 for Civil law and 0 otherwise. According to Brockman and Unlu (2009); La Porta et al. (1998); Shao et al. (2013), Common law countries have stronger shareholder protection. Estimation results in Table 5 indicate that key research findings are

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consistent with those presented in Section 4.

Table 5. Robustness checks with alternative measures of shareholder protection

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Dependent variable is cash to assets ratio (Cash_TAt). CRI is crisis dummy. IPR is investor protection index developed by La Porta et al. (2006). ADI is original creditor rights index developed by La Porta et al. (1998). LO is legal origin assigned 1 for Common law and 0 otherwise. CF is

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cash flow to assets. NWC is net working capital. TOB is Tobin’s Q. LEV is firm leverage. TAN is tangibility. CAP is capital expenditure. SIZ is firm size. DIV is dividend payment dummy. CRE is revised creditor right index developed by Djankov et al. (2007). UA, ID, MA and PD are four cultural dimensions (i.e. uncertainty avoidance, individualism, masculinity and power distance) from Hofstede et al. (2010). Private_credit is private

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credit to GDP. Market_cap is market capitalization to GDP. GDP_capita is natural logarithm of GDP per capita. GDP_growth is annual GDP growth rate. *** is significant at 1%. ** is significant at 5%. * is significant at 10%. T-statistics are in parentheses.

Variables

CRI*Shareholder protection

Jo

CRI

Shareholder protection CFt

NWCt TOBt LEVt

Shareholder protection is measured by IPR 0.0182*** (6.17) -0.0001 (-0.08) 0.0288*** (7.94) 0.5458*** (133.40) -0.5770*** (-95.66) 0.0155*** (22.32) 0.0544*** (17.86)

Shareholder protection is measured by ADI 0.0037*** (6.23) -0.0046* (-1.95) 0.0026*** (3.54) 0.5409*** (129.48) -0.5691*** (-91.61) 0.0157*** (22.47) 0.0548*** (17.65)

Shareholder protection is measured by LO 0.0085*** (6.14) 0.0065*** (7.11) 0.0012 (0.69) 0.5608*** (143.51) -0.5969*** (-106.55) 0.0138*** (22.88) 0.0589*** (20.44)

13

CRE UA ID MA PD Private_creditt Market_capt GDP_capitat GDP_growtht Intercept

ur na

Industry dummies R-squared N

-0.0736*** (-26.14) -0.0009 (-0.09) -0.0169*** (-49.73) -0.0222*** (-23.20) -0.0073*** (-9.02) -0.0004*** (-13.22) -0.0006*** (-14.83) 0.0009*** (30.71) 0.0001 (1.40) 0.0001*** (3.44) 0.0000** (-2.14) 0.0219*** (29.45) -0.0001 (-0.87) 0.0199** (2.01) Yes 0.7126 192,807

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DIVt

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SIZt

-0.0737*** (-23.90) -0.0020 (-0.18) -0.0175*** (-46.48) -0.0245*** (-21.90) -0.0059*** (-6.20) -0.0004*** (-7.33) -0.0004*** (-9.67) 0.0010*** (23.33) 0.0003*** (5.11) 0.0000* (-1.86) 0.0000 (1.27) 0.0221*** (27.13) -0.0014*** (-8.15) -0.0135 (-1.14) Yes 0.7017 163,245

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CAPt

-0.0738*** (-24.41) -0.0085 (-0.81) -0.0173*** (-47.47) -0.0228*** (-21.24) -0.0018** (-2.14) 0.0000 (-0.46) -0.0006*** (-13.93) 0.0008*** (24.34) 0.0002*** (3.20) 0.0000 (-0.52) 0.0000 (-0.34) 0.0237*** (30.87) -0.0007*** (-4.47) -0.0435*** (-3.99) Yes 0.704 172,157

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TANt

5.3. Robustness checks with different measures of excess cash Iskandar-Datta and Jia (2014) suggest using excess cash as a dependent variable instead of normal cash to investigate determinants of corporate cash holdings. In this study, I replace cash to assets ratio in Equation (1) by

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different measures of excess cash and report regression results with these alternative dependent variables as robustness checks. Following Iskandar-Datta and Jia (2014), I define excess cash as the cash reserve beyond the normal level. Normal cash is estimated with the following equation. Cash_TAt =  + 1CFt + 2 NWCt + 3TOBt + 4LEVt + 5TANt + 6CAPt + 7SIZt + 8DIVt + 9CRI +

10RAD + 11CRE + 12UA + 13ID +14MA +15PD +16Private_creditt + 17Market_capt + 18GDP_capitat + 19GDP_growtht + Industry dummies +  (2)

14

In line with Iskandar-Datta and Jia (2014), I also use three regression approaches to estimate normal cash and create three measures of excess cash namely Ex_cash1, Ex_cash2 and Ex_cash3. Ex_cash1 is based on country regression, Ex_cash2 is based on Fama and MacBeth (1973) regression and Ex_cash3 is based on pooled regression4. Table 6 shows that the interaction between shareholder protection and dummy crisis is also positively associated with each measure of excess cash. Therefore, my research findings remain unchanged. Table 6. Robustness checks with different measures of excess cash Ex_cash1, Ex_cash2 and Excash_3 are three measures of excess cash developed by Iskandar-Datta and Jia (2014). CRI is crisis dummy. RAD is revised anti-director rights index developed by Djankov et al. (2008). CF is cash flow to assets. NWC is net working capital. TOB is Tobin’s Q. LEV is firm leverage. TAN is tangibility. CAP is capital expenditure. SIZ is firm size. DIV is dividend payment dummy. CRE is revised creditor right index developed by Djankov et al. (2007). UA, ID, MA and PD are four cultural dimensions (i.e. uncertainty avoidance, individualism,

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masculinity and power distance) from Hofstede et al. (2010). Private_credit is private credit to GDP. Market_cap is market capitalization to GDP. GDP_capita is natural logarithm of GDP per capita. GDP_growth is annual GDP growth rate. *** is significant at 1%. ** is significant at 5%. * is significant at 10%. T-statistics are in parentheses.

CRI*RAD

RAD

lP

CFt NWCt

TANt

Jo

CAPt

ur na

TOBt LEVt

SIZt

DIVt CRE UA

4

Dependent variable is Ex_cash2t 0.0025*** (6.27) 0.0046*** (2.88) -0.0002 (-0.58) 0.0465*** (17.05) -0.0538*** (-13.10) -0.0040*** (-9.59) 0.0029 (1.28) 0.0087*** (3.84) -0.0424*** (-5.83) 0.0016*** (5.85) -0.0006 (-0.77) -0.0006 (-0.91) -0.0001* (-1.93)

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CRI

Dependent variable is Ex_cash1t 0.0022*** (5.53) 0.0002 (0.12) -0.0007* (-1.77) 0.0368*** (13.75) -0.0458*** (-11.37) 0.0014*** (3.54) -0.0198*** (-8.67) -0.0217*** (-9.64) 0.0344*** (4.81) -0.0031*** (-11.61) -0.0043*** (-5.21) -0.0060*** (-8.81) -0.0004*** (-14.62)

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Variables

Dependent variable is Ex_cash3t 0.0023*** (5.51) -0.0053*** (-3.18) 0.0042*** (9.37) 0.1112*** (36.82) -0.1552*** (-34.32) -0.0005 (-1.07) -0.0399*** (-16.44) -0.0440*** (-18.56) -0.0623*** (-8.08) 0.0079*** (27.97) -0.0152*** (-17.64) 0.0001 (0.14) 0.0002*** (6.64)

Please see Iskandar-Datta and Jia (2014) for further information.

15

-0.0005*** (-15.94) 0.0008*** (32.07) 0.0001** (2.21) -0.0003*** (-16.47) 0.0002*** (38.39) 0.0128*** (21.67) 0.0007*** (5.59) -0.0567*** (-7.01) Yes 0.1049 192,807

MA PD Private_creditt Market_capt GDP_capitat GDP_growtht Intercept Industry dummies R-squared N

0.0000 (1.22) 0.0000* (-1.76) 0.0000 (0.52) 0.0000 (0.86) 0.0000 (-1.42) -0.0038*** (-6.32) -0.0008*** (-6.43) 0.0103 (1.25) Yes 0.0265 192,807

0.0001*** (4.34) -0.0002*** (-5.77) 0.0001* (1.74) 0.0000* (-1.65) 0.0000** (2.26) -0.0042*** (-6.67) 0.0009*** (6.49) -0.0639*** (-7.47) Yes 0.1223 192,807

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ID

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5.4. Robustness checks with lagged firm-level variables

From econometric perspective, the problem of potential causality may arise since cash holdings are likely to

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affect firm-level characteristics. Consequently, I present regression results for the first lags of firm-specific variables as robustness checks. Table 7 shows that firms in countries of strong shareholder rights still hold more cash during

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the crisis period.

Table 7. Robustness checks with lagged firm-level variables

Cash_TA is cash to assets ratio. Cash_SA is cash to sales ratio. Ln(Cash_SA) is natural logarithm of cash to sales ratio. CRI is crisis dummy. RAD

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is revised anti-director rights index developed by Djankov et al. (2008). CF is cash flow to assets. NWC is net working capital. TOB is Tobin’s Q. LEV is firm leverage. TAN is tangibility. CAP is capital expenditure. SIZ is firm size. DIV is dividend payment dummy. CRE is revised creditor right index developed by Djankov et al. (2007). UA, ID, MA and PD are four cultural dimensions (i.e. uncertainty avoidance, individualism, masculinity and power distance) from Hofstede et al. (2010). Private_credit is private credit to GDP. Market_cap is market capitalization to GDP. GDP_capita is natural logarithm of GDP per capita. GDP_growth is annual GDP growth rate. *** is significant at 1%. ** is significant at 5%. * is

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significant at 10%. T-statistics are in parentheses.

Variables

CRI*RAD CRI RAD CFt-1 NWCt-1

Dependent variable is Cash_TAt 0.0044*** (6.57) -0.0144*** (-5.51) -0.0023*** (-3.88) 0.5193*** (115.41) -0.5138***

Dependent variable is Ln(Cash_TAt) 0.0307*** (6.57) -0.0644*** (-3.71) -0.0508*** (-9.51) 2.5815*** (103.12) -2.4840***

Dependent variable is Cash_SAt 0.0153*** (6.38) -0.0574*** (-6.04) -0.0222*** (-10.13) 0.7077*** (57.42) -0.7677***

Dependent variable is Ln(Cash_SAt) 0.0451*** (8.01) -0.1337*** (-6.42) -0.0847*** (-12.54) 2.4044*** (86.44) -2.7005***

16

SIZt-1 DIVt-1 CRE UA ID MA PD Private_creditt Market_capt GDP_capitat

Intercept

ur na

GDP_growtht

Industry dummies R-squared N

(-58.30) 0.1198*** (24.50) -0.4968*** (-21.16) -0.2636*** (-7.57) -0.2972*** (-2.65) 0.0133*** (3.51) -0.2086*** (-16.82) -0.0184* (-1.78) -0.0035*** (-8.60) -0.0095*** (-19.86) 0.0094*** (25.50) 0.0074*** (10.85) 0.0027*** (10.52) 0.0003*** (3.41) 0.1966*** (20.85) -0.0019 (-0.92) -4.3537*** (-31.53) Yes 0.3511 176,741

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CAPt-1

(-42.67) 0.0410*** (22.24) -0.1425*** (-17.14) 0.0060 (0.56) -0.3222*** (-9.12) -0.0046*** (-3.93) -0.0749*** (-19.57) -0.0037 (-1.35) -0.0012*** (-9.00) -0.0012*** (-8.31) 0.0016*** (14.75) 0.0013*** (6.66) 0.0004*** (5.78) 0.0001*** (3.16) 0.0208*** (6.85) -0.0028*** (-4.34) 0.0612 (1.59) Yes 0.247 176,741

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TANt-1

re

LEVt-1

(-61.81) 0.1049*** (26.57) 0.1811*** (9.80) -0.7653*** (-27.29) 0.8313*** (8.85) -0.0483*** (-16.07) -0.0285*** (-2.87) -0.0287*** (-3.47) -0.0022*** (-7.17) -0.0087*** (-23.11) 0.0091*** (31.81) 0.0024*** (4.63) 0.0015*** (7.30) 0.0000 (0.67) 0.2315*** (31.22) 0.0105*** (6.11) -4.6174*** (-41.72) Yes 0.4358 176,741

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TOBt-1

(-79.92) 0.0221*** (29.95) 0.0482*** (18.50) -0.0706*** (-22.92) -0.0013 (-0.11) -0.0160*** (-42.67) -0.0173*** (-15.32) -0.0066*** (-7.47) -0.0004*** (-10.57) -0.0006*** (-14.46) 0.0010*** (29.85) 0.0000 (-0.28) 0.0001*** (3.00) 0.0000*** (4.01) 0.0182*** (21.84) 0.0001 (0.58) 0.0375*** (3.27) Yes 0.5773 176,741

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4.4. Additional analysis

According to Almeida et al. (2004); Song and Lee (2012), firms with financial constraint tend to save more

cash because of precaution motive. Therefore, I argue that managers may take advantage of financial constraint to reduce the controlling effect of shareholder rights on corporate cash holdings during the crisis period. I use three alternative measures including Whited and Wu (2006) score, firm size and firm leverage to classify firm-year observations in the research sample into financially constrained and unconstrained groups. An observation is considered as financially constrained (unconstrained) if its WW index/financial leverage is in the top (bottom) 30%

17

of its country’s annual ranking or its firm size belongs to the bottom (top) 30% of its country’s annual size distribution. Regression results presented in Table 8 show that the interactive term between shareholder protection and crisis dummy is statistically and economically higher for the sub-sample of financially constrained firms. Besides, I also conduct Chow test to compare the interactive term’s coefficients of financially constrained and unconstrained firms and find consistent results. These findings imply that corporate managers are likely to take advantage of financial constraint to mitigate the controlling effect of shareholder protection on cash holdings over the financial crisis. Table 8. Regression results by financial constraint Dependent variable is cash to assets ratio (Cash_TAt). CRI is crisis dummy. RAD is revised anti-director rights index developed by Djankov et al. (2008). CF is cash flow to assets. NWC is net working capital. TOB is Tobin’s Q. LEV is firm leverage. TAN is tangibility. CAP is capital

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expenditure. SIZ is firm size. DIV is dividend payment dummy. CRE is revised creditor right index developed by Djankov et al. (2007). UA, ID, MA and PD are four cultural dimensions (i.e. uncertainty avoidance, individualism, masculinity and power distance) from Hofstede et al. (2010). Private_credit is private credit to GDP. Market_cap is market capitalization to GDP. GDP_capita is natural logarithm of GDP per capita. GDP_growth is annual GDP growth rate. *** is significant at 1%. ** is significant at 5%. * is significant at 10%. T-statistics are in parentheses.

CRI RAD CFt

TOBt LEVt TANt

Jo

CAPt SIZt

DIVt CRE UA ID

0.0020** (2.12) 0.0090** (2.33) -0.0008 (-0.94) 0.5070*** (84.42) -0.5410*** (-57.96) 0.0175*** (19.46) 0.0384*** (8.00) -0.0952*** (-18.76) 0.1128*** (7.24) -0.0204*** (-26.95) -0.0324*** (-18.28) -0.0087*** (-6.35) 0.0001 (1.61) 0.0000

ur na

NWCt

0.0006 (0.82) -0.0001 (-0.02) -0.0024*** (-3.35) 0.6925*** (128.03) -0.7017*** (-91.14) -0.0044*** (-5.23) 0.0583*** (14.23) -0.0233*** (-6.88) -0.1975*** (-15.16) -0.0069*** (-13.00) -0.0166*** (-11.92) -0.0046*** (-4.37) 0.0001*** (4.06) 0.0000***

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CRI*RAD

0.0003 (0.54) 0.0045** (1.96) -0.0005 (-0.86) 0.6694*** (103.83) -0.7126*** (-89.35) -0.0069*** (-6.66) 0.0769*** (20.77) -0.0377*** (-12.82) -0.1387*** (-12.28) -0.0044*** (-8.97) -0.0171*** (-15.65) -0.0031*** (-3.82) 0.0001*** (3.35) 0.0000***

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Variables

Financial constraint (Firm size) Large Small

0.0040*** (3.04) 0.0034 (0.65) -0.0005 (-0.37) 0.4989*** (97.62) -0.4850*** (-51.55) 0.0181*** (21.93) 0.0450*** (7.68) -0.0892*** (-13.61) 0.1474*** (7.49) -0.0297*** (-19.47) -0.0141*** (-5.54) -0.0074*** (-3.79) 0.0002*** (4.06) -0.0000

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Financial constraint (WW index) Low High

Financial constraint (Leverage) Low High

0.0024** (2.40) 0.0011 (0.27) 0.0019** (2.22) 0.6367*** (91.85) -0.6845*** (-67.31) 0.0092*** (10.69) -0.0079 (-0.98) -0.0523*** (-11.25) -0.1051*** (-6.64) -0.0190*** (-29.33) -0.0271*** (-15.59) -0.0088*** (-6.64) 0.0001*** (3.64) 0.0000***

0.0036*** (3.37) -0.0005 (-0.12) -0.0029*** (-3.15) 0.4842*** (96.30) -0.5208*** (-66.41) 0.0144*** (14.18) 0.1501*** (20.32) -0.1038*** (-20.30) 0.1951*** (10.29) -0.0129*** (-23.74) -0.0104*** (-5.81) -0.0045*** (-3.11) 0.0001*** (3.64) 0.0000

18

PD Private_creditt Market_capt GDP_capitat GDP_growtht Intercept Industry dummies R-squared Chow test N

(-2.64) (-0.94) 0.0063*** 0.0350*** (7.28) (21.86) -0.0003* 0.0010*** (-1.87) (2.74) -0.0002*** -0.0006*** (-5.59) (-7.72) -0.0003*** -0.0008*** (-8.45) (-8.78) 0.0005*** 0.0014*** (17.14) (20.45) 0.0002*** -0.0002 (3.31) (-1.56) -0.0315*** 0.0163 (-2.61) (0.64) Yes Yes 0.8045 0.6411 7.01*** 58,089 58,088

(-3.19) (1.20) 0.0247*** 0.0176*** (18.86) (14.34) -0.0003 0.0009*** (-0.97) (2.87) -0.0004*** -0.0004*** (-6.81) (-7.02) -0.0006*** -0.0005*** (-10.25) (-8.30) 0.0011*** 0.0007*** (21.75) (14.02) 0.0001 -0.0000 (0.67) (-0.24) 0.0029 -0.0656*** (0.17) (-3.43) Yes Yes 0.7243 0.6864 5.29*** 58,089 58,088

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MA

(-3.34) (0.31) 0.0082*** 0.0263*** (7.27) (23.93) 0.0000 0.0002 (0.04) (0.79) -0.0002*** -0.0005*** (-3.47) (-10.52) -0.0005*** -0.0005*** (-9.71) (-8.86) 0.0006*** 0.0010*** (16.54) (21.38) 0.0002*** -0.0001 (3.35) (-1.16) 0.0045 0.0506*** (0.32) (3.13) Yes Yes 0.8642 0.6145 15.34*** 54,432 66,621

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5. Conclusions

This paper analyzes how the global financial crisis changes the role of agency motive in corporate cash

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holdings. I argue that the global financial crisis results in more opportunities for managers to expropriate shareholders. Using a sample of 192,807 observations across 40 countries, I find that the global financial crisis mitigates the

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controlling effect of shareholder protection on corporate cash holdings. In addition, this mitigating role is stronger in financially constrained firms. Overall, the results suggest that managers are more likely to expropriate shareholders through corporate liquidity policy over a financial crisis. This paper implies that shareholders should improve

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corporate governance to control managers more effectively or pressure managers to disgorge cash during a financial crisis. In addition, policy makers should also have stricter regulations on corporate governance and information

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announcement to control managers’ behavior when the economy is plunged into a crisis.

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Appendix 1. Interaction plot

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