What is it about?
Creditor rights along with country governance is the main determinant of cash holdings of firms from all around the world.
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Why is it important?
Creditor rights affect the willingness of lenders to provide credit, which in turn affects the need for internal liquidity and cash holdings. This relationship depends on the quality of country governance. It appears that the fear of expropriation motivates creditors with stronger rights to require higher levels of cash holding by borrowers.
Perspectives
Stronger creditor rights in well-governed countries result in more availability of funds due to lower interest rates and an increased willingness by creditors to supply funds. The increased availability of funds should be evident today as well as in the future. As a result, firms will be able to hold less cash now because they do not have to save as much now for future investments (the precautionary motive for holding funds should be reduced).
Dr Halit Gonenc
Rijksuniversiteit Groningen
Read the Original
This page is a summary of: Creditor Rights, Country Governance, and Corporate Cash Holdings, Journal of International Financial Management and Accounting, October 2015, Wiley,
DOI: 10.1111/jifm.12033.
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