Discussion paper

DP3499 Corporate Liquidity

Agency problems are an important determinant of corporate liquidity. For a sample of more than 11,000 firms from 45 countries, we find that corporations in countries where shareholders rights are not well protected hold up to twice as much cash as corporations in countries with good shareholder protection. In addition, when shareholder protection is poor, factors that generally drive the need for liquidity, such as investment opportunities and asymmetric information, actually become less important. These results strengthen after controlling for capital market development. In fact, consistent with the importance of agency costs, we find that managers actually hold larger cash balances when capital markets are better developed. Our evidence indicates that investors in countries with poor shareholder protection cannot force managers to disgorge excessive cash balances.


Servaes, H, J Mahrt-Smith and A Dittmar (2002), ‘DP3499 Corporate Liquidity‘, CEPR Discussion Paper No. 3499. CEPR Press, Paris & London. https://cepr.org/publications/dp3499