Hostname: page-component-78c5997874-ndw9j Total loading time: 0 Render date: 2024-11-15T12:04:28.484Z Has data issue: false hasContentIssue false
  • English
  • Français

State Ownership and Corporate Cash Holdings

Published online by Cambridge University Press:  31 July 2018

Ruiyuan (Ryan) Chen ,
Sadok El Ghoul ,
Omrane Guedhami  and
Robert Nash
Get access Rights & Permissions [Opens in a new window]

Abstract

Using a unique sample of newly privatized firms from 59 countries, this article provides new evidence about the agency costs of state ownership and new insight into the corporate governance role of country-level institutions. Consistent with agency theory, we find strong and robust evidence that state ownership is positively related to corporate cash holdings. Moreover, we find that the strength of country-level institutions affects the relation between state ownership and the value of cash holdings. In particular, as state ownership increases, markets discount the value of cash holdings more in countries with weaker institutions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 5 , October 2018 , pp. 2293 - 2334
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

We thank Najah Attig, Jarrad Harford (the editor), Stefano Lugo, William Megginson (the referee), John Puthenpurackal, He Wang, Zuobao Wei, Qiping Xu, Suyan Zheng, seminar participants at Kyoto University and Saint Mary’s University, and participants at the 2016 Financial Management Association Meeting, the 2016 Midwest Finance Association Meeting, the 2016 Southwestern Finance Association Conference, the 2016 World Finance and Banking Symposium, and the 2015 Paris Financial Management Conference for their insightful comments. We appreciate generous financial support from Canada’s Social Sciences and Humanities Research Council.

References

Anderson, J. H.; Korsun, G.; and Murrell, P.. “Which Enterprises (Believe They) Have Soft Budgets after Mass Privatization? Evidence from Mongolia.” Journal of Comparative Economics, 28 (2000), 219–246.Google Scholar
Barth, J. R.; Caprio, G. Jr.; and Levine, R.. “Bank Regulation and Supervision in 180 Countries from 1999 to 2011.” Journal of Financial Economic Policy, 5 (2013), 111–219.Google Scholar
Bates, T. W.; Kahle, K. M.; and Stulz, R. M.. “Why Do US Firms Hold So Much More Cash than They Used To?” Journal of Finance, 64 (2009), 1985–2021.Google Scholar
Beck, T.; Clarke, G.; Groff, A.; Keefer, P.; and Walsh, P.. “New Tools in Comparative Political Economy: The Database of Political Institutions.” World Bank Economic Review, 15 (2001), 165–176.Google Scholar
Booth, J. R., and Smith, R. L.. “Capital Raising, Underwriting and the Certification Hypothesis.” Journal of Financial Economics, 15 (1986), 261–281.Google Scholar
Borisova, G.; Brockman, P.; Salas, J. M.; and Zagorchev, A.. “Government Ownership and Corporate Governance: Evidence from the EU.” Journal of Banking & Finance, 36 (2012), 2917–2934.Google Scholar
Borisova, G.; Fotak, V.; Holland, K.; and Megginson, W. L.. “Government Ownership and the Cost of Debt: Evidence from Government Investments in Publicly Traded Firms.” Journal of Financial Economics, 118 (2015), 168–191.Google Scholar
Borisova, G., and Megginson, W. L.. “Does Government Ownership Affect the Cost of Debt? Evidence from Privatization.” Review of Financial Studies, 24 (2011), 2693–2737.Google Scholar
Bortolotti, B., and Faccio, M.. “Government Control of Privatized Firms.” Review of Financial Studies, 22 (2009), 2907–2939.Google Scholar
Bortolotti, B., and Pinotti, P.. “The Political Economy of Privatization.” Working Paper, Fondazione Eni Enrico Mattei 2003.45, available at http://www.feem.it/userfiles/attach/Publication/NDL2003/NDL2003-045.pdf (2003).Google Scholar
Boubakri, N., and Cosset, J. C.. “The Financial and Operating Performance of Newly Privatized Firms: Evidence from Developing Countries.” Journal of Finance, 53 (1998), 1081–1110.Google Scholar
Boubakri, N.; Cosset, J. C.; and Guedhami, O.. “Postprivatization Corporate Governance: The Role of Ownership Structure and Investor Protection.” Journal of Financial Economics, 76 (2005), 369–399.Google Scholar
Boubakri, N.; Cosset, J. C.; and Saffar, W.. “The Role of State and Foreign Owners in Corporate Risk-Taking: Evidence from Privatization.” Journal of Financial Economics, 108 (2013), 641–658.Google Scholar
Boubakri, N.; Guedhami, O.; Kwok, C.; and Saffar, W.. “National Culture and Privatization: The Relationship between Collectivism and Residual State Ownership.” Journal of International Business Studies, 47 (2016), 170–190.Google Scholar
Boubakri, N.; Guedhami, O.; Mishra, D.; and Saffar, W.. “Political Connections and the Cost of Equity Capital.” Journal of Corporate Finance, 18 (2012), 541–559.Google Scholar
Boutchkova, M. K., and Megginson, W. L.. “Privatization and the Rise of Global Capital Markets.” Financial Management, 29 (2000), 31–75.Google Scholar
Brunetti, A., and Weder, B.. “A Free Press Is Bad News for Corruption.” Journal of Public Economics, 87 (2003), 1801–1824.Google Scholar
Bushman, R.; Piotroski, J.; and Smith, A.. “What Determines Corporate Transparency?” Journal of Accounting Research, 42 (2004), 207–252.Google Scholar
Campbell, J. Y.“Understanding Risk and Return.” Journal of Political Economy, 104 (1996), 298–345.Google Scholar
Caprio, L.; Faccio, M.; and McConnell, J.. “Sheltering Corporate Assets from Political Extraction.” Journal of Law, Economics, and Organization, 29 (2013), 332–354.Google Scholar
Carter, R. B.; Dark, F. H.; and Singh, A. K.. “Underwriter Reputation, Initial Returns, and the Long-Run Performance of IPO Stocks.” Journal of Finance, 53 (1998), 285–311.Google Scholar
Carter, R., and Manaster, S.. “Initial Public Offerings and Underwriter Reputation.” Journal of Finance, 45 (1990), 1045–1067.Google Scholar
Chaney, P. K.; Faccio, M.; and Parsley, D.. “The Quality of Accounting Information in Politically Connected Firms.” Journal of Accounting and Economics, 51 (2011), 58–76.Google Scholar
Chemmanur, T. J., and Fulghieri, P.. “Investment Bank Reputation, Information Production, and Financial Intermediation.” Journal of Finance, 49 (1994), 57–79.Google Scholar
Chen, H. C., and Ritter, J. R.. “The Seven Percent Solution.” Journal of Finance, 55 (2000), 1105–1131.Google Scholar
Chen, Q.; Chen, X.; Schipper, K.; Xu, Y.; and Xue, J.. “The Sensitivity of Corporate Cash Holdings to Corporate Governance.” Review of Financial Studies, 25 (2012), 3610–3644.Google Scholar
Chen, R.; El Ghoul, S.; Guedhami, O.; and Wang, H.. “Do State and Foreign Ownership Affect Investment Efficiency? Evidence from Privatizations.” Journal of Corporate Finance, 42 (2017), 408–421.Google Scholar
Coffee, J. C. Jr.. “The Future as History: The Prospects for Global Convergence in Corporate Governance and Its Implications.” Northwestern University Law Review, 93 (1999), 641–707.Google Scholar
Denis, D. K., and McConnell, J. J.. “International Corporate Governance.” Journal of Financial and Quantitative Analysis, 38 (2003), 1–36.Google Scholar
Dinc, S., and Gupta, N.. “The Decision to Privatize: Finance and Politics.” Journal of Finance, 66 (2011), 241–269.Google Scholar
Dittmar, A., and Mahrt-Smith, J.. “Corporate Governance and the Value of Cash Holdings.” Journal of Financial Economics, 83 (2007), 599–634.Google Scholar
Dittmar, A.; Mahrt-Smith, J.; and Servaes, H.. “International Corporate Governance and Corporate Cash Holdings.” Journal of Financial and Quantitative Analysis, 38 (2003), 111–133.Google Scholar
Djankov, S.; La Porta, R.; Lopez-de-Silanes, F.; and Shleifer, A.. “The Regulation of Entry.” Quarterly Journal of Economics, 117 (2002), 1–37.Google Scholar
Djankov, S.; La Porta, R.; Lopez-de-Silanes, F.; and Shleifer, A.. “The Law and Economics of Self-Dealing.” Journal of Financial Economics, 88 (2008), 430–465.Google Scholar
Djankov, S.; La Porta, R.; Lopez-de-Silanes, F.; and Shleifer, A.. “Disclosure by Politicians.” American Economic Journal: Applied Economics, 2 (2010), 179–209.Google Scholar
D’Souza, J., and Megginson, W. L.. “The Financial and Operating Performance of Privatized Firms during the 1990s.” Journal of Finance, 54 (1999), 1397–1438.Google Scholar
Duchin, R.“Cash Holdings and Corporate Diversification.” Journal of Finance, 65 (2010), 955–992.Google Scholar
Dyck, A.; Volchkova, N.; and Zingales, L.. “The Corporate Governance Role of the Media: Evidence from Russia.” Journal of Finance, 63 (2008), 1093–1135.Google Scholar
Dyck, A., and Zingales, L.. “The Corporate Governance Role of the Media.” In The Right to Tell: The Role of the Media in Development, Islam, R., ed. Washington, DC: World Bank (2002), 107–140.Google Scholar
Dyck, A., and Zingales, L.. “Private Benefits of Control: An International Comparison.” Journal of Finance, 59 (2004), 537–600.Google Scholar
Eberhart, A. C.; Maxwell, W. F.; and Siddique, A. R.. “An Examination of Long-Term Abnormal Stock Returns and Operating Performance following R&D Increases.” Journal of Finance, 59 (2004), 623–650.Google Scholar
El Ghoul, S.; Guedhami, O.; Nash, R.; and Patel, A.. “New Evidence on the Role of the Media in Corporate Social Responsibility.” Journal of Business Ethics, forthcoming (2018).Google Scholar
Faccio, M.“Politically Connected Firms.” American Economic Review, 96 (2006), 369–386.Google Scholar
Faccio, M.; Masulis, R. W.; and McConnell, J.. “Political Connections and Corporate Bailouts.” Journal of Finance, 61 (2006), 2597–2635.Google Scholar
Fang, L. H.“Investment Bank Reputation and the Price and Quality of Underwriting Services.” Journal of Finance, 60 (2005), 2729–2761.Google Scholar
Firth, M.; Malatesta, P.; Xin, Q.; and Xu, L.. “Corporate Investment, Government Control, and Financing Channels: Evidence from China’s Listed Companies.” Journal of Corporate Finance, 18 (2012), 433–450.Google Scholar
Frydman, R.; Gray, C.; Hessel, M.; and Rapaczynski, A.. “The Limits of Discipline: Ownership and Hard Budget Constraints in the Transition Economies.” Economics of Transition, 8 (2000), 577–601.Google Scholar
Gao, H.; Harford, J.; and Li, K.. “Determinants of Corporate Cash Policy: Insights from Private Firms.” Journal of Financial Economics, 109 (2013), 623–639.Google Scholar
Gao, X., and Ritter, J. R.. “The Marketing of Seasoned Equity Offerings.” Journal of Financial Economics, 97 (2010), 33–52.Google Scholar
Glaeser, E.; La Porta, R.; Lopez-de-Silanes, F.; and Shleifer, A.. “Do Institutions Cause Growth?” Journal of Economic Growth, 9 (2004), 271–303.Google Scholar
Golubov, A.; Petmezas, D.; and Travlos, N. G.. “When It Pays to Pay Your Investment Banker: New Evidence on the Role of Financial Advisors in M&As.” Journal of Finance, 67 (2012), 271–311.Google Scholar
Graham, J., and Leary, M.. “The Evolution of Corporate Cash.” Working Paper, Duke University and National Bureau of Economic Research, available at https://ssrn.com/abstract=2805505 (2016).Google Scholar
Guedhami, O.; Pittman, J. A.; and Saffar, W.. “Auditor Choice in Privatized Firms: Empirical Evidence on the Role of State and Foreign Owners.” Journal of Accounting and Economics, 48 (2009), 151–171.Google Scholar
Harford, J.“Corporate Cash Reserves and Acquisitions.” Journal of Finance, 54 (1999), 1969–1997.Google Scholar
Harford, J.; Mansi, S. A.; and Maxwell, W. F.. “Corporate Governance and Firm Cash Holdings in the US.” Journal of Financial Economics, 87 (2008), 535–555.Google Scholar
Haw, I.; Hu, B.; Hwang, L.; and Wu, W.. “Ultimate Ownership, Income Management, and Legal and Extra-Legal Institutions.” Journal of Accounting Research, 42 (2004), 423–462.Google Scholar
Heckman, J.“Sample Selection Bias as a Specification Error.” Econometrica, 47 (1979), 153–161.Google Scholar
Hellman, J.; Jones, G.; and Kaufman, D.. “Seize the State, Seize the Day: State Capture, Corruption, and Influence in Transition.” Journal of Comparative Economics, 31 (2003), 751–773.Google Scholar
Henisz, W.“The Institutional Environment for Infrastructure Investment.” Industrial and Corporate Change, 11 (2002), 355–389.Google Scholar
Hofstede, G. Culture’s Consequences: Comparing Values, Behaviors, Institutions, and Organizations across Nations, 2nd ed. Thousand Oaks, CA: Sage (2001).Google Scholar
Huang, R., and Zhang, D.. “Managing Underwriters and the Marketing of Seasoned Equity Offerings.” Journal of Financial and Quantitative Analysis, 46 (2011), 141–170.Google Scholar
Jaslowitzer, P.; Megginson, W. L.; and Rapp, M.. “Disentangling the Effects of State Ownership on Investment—Evidence from Europe.” Working Paper, University of Marburg, available at https://ssrn.com/abstract=2735698 (2016).Google Scholar
Jensen, M. C.“Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers.” American Economic Review, 76 (1986), 323–329.Google Scholar
Johnson, J. M., and Miller, R. E.. “Investment Banker Prestige and the Underpricing of Initial Public Offerings.” Financial Management, 17 (1988), 19–29.Google Scholar
Johnson, S.; La Porta, R.; Lopez-de-Silanes, F.; and Shleifer, A.. “Tunneling.” American Economic Review: Papers and Proceedings, 90 (2000), 22–27.Google Scholar
Johnston, M.“Public Officials, Private Interests, and Sustainable Democracy: When Politics and Corruption Meet.” In Corruption and the Global Economy, Elliot, K., ed. Washington, DC: Institute for International Economics (1997), 61–82.Google Scholar
Kalcheva, I., and Lins, K. V.. “International Evidence on Cash Holdings and Expected Managerial Agency Problems.” Review of Financial Studies, 20 (2007), 1087–1112.Google Scholar
Keefer, P.“When Do Special Interests Run Rampant? Disentangling the Role of Elections, Incomplete Information, and Checks and Balances in Banking Crises.” Working Paper, World Bank (2001).Google Scholar
Keefer, P., and Knack, S.. “Why Don’t Poor Countries Catch Up? A Cross-National Test of an Institutional Explanation.” Economic Inquiry, 35 (1997), 590–602.Google Scholar
Kleibergen, F., and Paap, R.. “Generalized Reduced Rank Tests Using the Singular Value Decomposition.” Journal of Econometrics, 133 (2006), 97–126.Google Scholar
Kornai, J.“Resource-Constrained versus Demand-Constrained Systems.” Econometrica, 47 (1979), 801–819.Google Scholar
Kornai, J. Economics of Shortage. Amsterdam, Netherlands: North Holland (1980).Google Scholar
Kornai, J.; Maskin, E.; and Roland, G.. “Understanding the Soft Budget Constraint.” Journal of Economic Literature, 41 (2003), 1095–1136.Google Scholar
Kusnadi, Y.; Yang, Z.; and Zhou, Y.. “Institutional Development, State Ownership, and Corporate Cash Holdings: Evidence from China.” Journal of Business Research, 68 (2015), 351–359.Google Scholar
Laffont, J. J., and Tirole, J.. A Theory of Incentives in Procurement and Regulation. Cambridge, MA: MIT Press (1993).Google Scholar
La Porta, R.; Lopez-de-Silanes, F.; Pop-Eleches, C.; and Shleifer, A.. “Judicial Checks and Balances.” Journal of Political Economy, 112 (2004), 445–470.Google Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R.. “Legal Determinants of External Finance.” Journal of Finance, 52 (1997), 1131–1150.Google Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R.. “Law and Finance.” Journal of Political Economy, 106 (1998), 1113–1155.Google Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R.. “Investor Protection and Corporate Valuation.” Journal of Finance, 57 (2002), 1147–1170.Google Scholar
Leland, H. E., and Pyle, D. H.. “Informational Asymmetries, Financial Structure, and Financial Intermediation.” Journal of Finance, 32 (1977), 371–387.Google Scholar
Liu, Q., and Siu, A.. “Institutional and Corporate Investment: Evidence from Investment-Implied Return on Capital in China.” Journal of Financial and Quantitative Analysis, 46 (2011), 1831–1864.Google Scholar
Liu, X., and Ritter, J. R.. “Local Underwriter Oligopolies and IPO Underpricing.” Journal of Financial Economics, 102 (2011), 579–601.Google Scholar
Logue, D. E.“On the Pricing of Unseasoned Equity Issues: 1965–1969.” Journal of Financial and Quantitative Analysis, 8 (1973), 91–103.Google Scholar
Masulis, R. W.; Wang, C.; and Xie, F.. “Corporate Governance and Acquirer Returns.” Journal of Finance, 62 (2007), 1851–1889.Google Scholar
McLean, R. D.“Share Issuance and Cash Savings.” Journal of Financial Economics, 99 (2011), 693–715.Google Scholar
Megginson, W. L.“Privatization, State Capitalism, and State Ownership of Business in the 21st Century.” Foundations and Trends in Finance, 11 (2017), 1–153.Google Scholar
Megginson, W. L.; Nash, R. C.; and Van Randenborgh, M.. “The Financial and Operating Performance of Newly Privatized Firms: An International Empirical Analysis.” Journal of Finance, 49 (1994), 403–452.Google Scholar
Megginson, W. L., and Netter, J. M.. “From State to Market: A Survey of Empirical Studies on Privatization.” Journal of Economic Literature, 39 (2001), 321–389.Google Scholar
Megginson, W. L.; Ullah, B.; and Wei, Z.. “State Ownership, Soft-Budget Constraints, and Cash Holdings: Evidence from China’s Privatized Firms.” Journal of Banking & Finance, 48 (2014), 276–291.Google Scholar
Megginson, W. L., and Weiss, K. A.. “Venture Capitalist Certification in Initial Public Offerings.” Journal of Finance, 46 (1991), 879–903.Google Scholar
Meltzer, A. H.“The Demand for Money: The Evidence from the Time Series.” Journal of Political Economy, 71 (1963), 219–246.Google Scholar
Miller, M. H., and Orr, D.. “A Model of the Demand for Money by Firms.” Quarterly Journal of Economics, 80 (1966), 413–435.Google Scholar
Mills, J. P.“Table of Ratio: Area to Bounding Ordinate for Any Portion of the Normal Curve.” Biometrika, 18 (1926), 395–400.Google Scholar
Mola, S., and Loughran, T.. “Discounting and Clustering in Seasoned Equity Offering Prices.” Journal of Financial and Quantitative Analysis, 39 (2004), 1–23.Google Scholar
Mulligan, C. B.“Scale Economies, the Value of Time, and the Demand for Money: Longitudinal Evidence from Firms.” Journal of Political Economy, 105 (1997), 1061–1079.Google Scholar
Myers, S. C.“The Capital Structure Puzzle.” Journal of Finance, 39 (1984), 574–592.Google Scholar
Myers, S. C., and Majluf, N. S.. “Corporate Financing and Investment Decisions When Firms Have Information hat Investors Do Not Have.” Journal of Financial Economics, 13 (1984), 187–221.Google Scholar
Myers, S. C., and Rajan, R.. “The Paradox of Liquidity.” Quarterly Journal of Economics, 113 (1998), 733–771.Google Scholar
Opler, T.; Pinkowitz, L.; Stulz, R.; and Williamson, R.. “The Determinants and Implications of Corporate Cash Holdings.” Journal of Financial Economics, 52 (1999), 3–46.Google Scholar
Pinkowitz, L.; Stulz, R.; and Williamson, R.. “Does the Contribution of Corporate Cash Holdings and Dividends to Firm Value Depend on Governance? A Cross-Country Analysis.” Journal of Finance, 61 (2006), 2725–2751.Google Scholar
Shleifer, A., and Vishny, R.. “A Survey of Corporate Governance.” Journal of Finance, 52 (1997), 737–783.Google Scholar
Titman, S., and Trueman, B.. “Information Quality and the Valuation of New Issues.” Journal of Accounting and Economics, 8 (1986), 159–172.Google Scholar
Vickers, J., and Yarrow, G.. Privatization: An Economic Analysis. Cambridge, MA: MIT Press (1988).Google Scholar
Vickers, J., and Yarrow, G.. “Economic Perspectives on Privatization.” Journal of Economic Perspectives, 5 (1991), 111–132.Google Scholar
Supplementary material: File

Chen et al. supplementary material

Chen et al. supplementary material 1

Download Chen et al. supplementary material(File)
File 232.6 KB