Does the Contribution of Corporate Cash Holdings and Dividends to Firm Value Depend on Governance? A Cross-country Analysis


  • Lee Pinkowitz and Rohan Williamson are associated with Georgetown University and René Stulz with The Ohio State University, ECGI, and NBER. Pinkowitz and Williamson thank the Capital Markets Research Center at Georgetown University and the Steers Faculty Research Fellowship through the McDonough School of Business for financial support. René Stulz is grateful for the hospitality of the Kellogg Graduate School of Management at Northwestern University and the George G. Stigler Center for the Study of the Economy and State at the University of Chicago, where some of this research was conducted. We thank Kathryn-Ann Bloomfield, Michael Chiang, Mark Ervin, Jennifer Rooke, and especially Aaron Kravitz and Regina Lawrence, for their help with the data collection. We are grateful to Heitor Almeida, Harry DeAngelo, Linda DeAngelo, Doug Diamond, Ole-Kristian Hope, Oguzhan Ozbas, Jan Mahrt-Smith, Henri Servaes, Rob Stambaugh, Mike Weisbach, Luigi Zingales, an anonymous referee, and seminar participants at American University, Georgetown University, MIT, University of Chicago, University of Northern Illinois, University of Southern California, and University of Toronto for useful comments.


Agency theories predict that the value of corporate cash holdings is less in countries with poor investor protection because of the greater ability of controlling shareholders to extract private benefits from cash holdings in such countries. Using various specifications of the valuation regressions of Fama and French (1998), we find that the relation between cash holdings and firm value is much weaker in countries with poor investor protection than in other countries. In further support of the importance of agency theories, the relation between dividends and firm value is weaker in countries with stronger investor protection.