Securities Laws, Control of Corruption, and Corporate Liquidity: International Evidence

Abstract

Manuscript Type: EmpiricalResearch Question/Issue: Previous studies have reported the relationship between corporate governance and corporate liquidity (cash holdings). Factors affecting corporate governance, such as securities laws and control of corruption, should have bearing on corporate liquidity and its value. This study focuses on national-level predictors of cash holdings such as securities laws and control of corruption and examines their impact on corporate liquidity, as well as its value from the agency perspective.c org_823 3..24 Research Findings/Insights: Using comprehensive data on 47 countries from 1996-2007, this study demonstrates that when benchmark variables are controlled, corporate liquidity is lower in countries with more effective securities laws or higher control of corruption. In addition, cash can increase firm value. This positive relation is more pronounced in countries with effective securities laws or high control of corruption. Furthermore, excess cash can reduce firm value in countries with ineffective securities laws or low control of corruption as opposed to other countries; however, this value-reducing effect can be mitigated or reversed when control of corruption or securities laws improve. Theoretical/Academic Implications: This study establishes that securities laws and control of corruption, in addition to the traditional cash determinants, play important roles in determining corporate liquidity and its value, and should therefore not be ignored in future liquidity studies. In addition, securities laws and control of corruption reinforce each other in the reduction of internal agency problems. Furthermore, this study provides empirical support for agency theory to explain corporate cash holdings. Practitioner/Policy Implications: Multinational firms should consider the potential impact of different securities laws and control of corruption of foreign countries in deciding the amount of cash to hold. Results suggest that firms should decrease target cash level in countries with more effective securities laws or higher control of corruption because investor protection is stronger, and the agency problem is less severe. In addition, excess cash should not be held in countries with ineffective securities laws or low control of corruption because these circumstances can reduce firm value, unless these countries substantially improve their control of corruption or securities laws. As for policy makers, caution has to be exercised when improving securities laws or repressing corruption; the concurrent improvement of both is more effective for stronger investor protection and better corporate governance.

A Cross-Country Investigation of Corporate Governance and Corporate Sustainability Disclosure: A Signaling Theory Perspective

“…We also find a positive and significant relationship between the MB ratio and TSD (ρ < 0.01). The result indicates that high market growth representing the higher growth potential leads to more TSD, consistent with Chen [48]. Moreover, LEV and TSD have a negative and significant relationship (ρ < 0.10) as expected and the result is consistent with Khan et al [18], and Ntim et al [14].…”

“…MB: Market-to-Book ratio measured as a natural log of the equity's book value divided by the equity's market value following de Villiers et al [6]. The variable explains the organization's long-term growth potential and sustainability opportunities [6,48].…”

Blood in the boardroom: Family relationships influencing the functions of the board

“…Liquidity was observed through Affä rsdata, which contains accounting data from the annual report of 2009. It could be expected to be inversely correlated with the monitoring function since high liquidity reduces short-term financial stress (Chen, 2011). Solidity, i.e., leverage measured as equity/total capital, was observed through Affä rsdata, which contains accounting data from the annual report of 2009.…”

Board Directors’ Expertise and Corporate Corruption Disclosure: The Moderating Role of Political Connections

“…Moreover, from the perspective of a developed country, Fernández-Gago et al [10] have found that there is a negative relationship between an independent director and his or her political connections in the CSR disclosure of Spanish corporations, while Shi et al [71] have shown how high-level, politically-connected independent directors have destroyed the value of Chinese firms. According to the arguments of Shi et al [71], Muttakin et al [4], Chen [26] and Chen et al [38] we believe that in Bangladesh, which has a looser control over corruption and the rule of law, the political connection of firms has drastically reduced the role of legal experts. As a result, we propose the following hypothesis:…”

“…As corruption is a global problem that compromises governance, transparency and accountability, it is treated as a cancerous presence within society [20]. Moreover, the existing literature also reports that developing countries are highly affected by corruption, because it affects both economic growth and financial stability [20][21][22][23][24][25][26]. This raises the question of why researchers covering developing countries have neglected the issue of corporate corruption.…”