Journal of Financial Economics 98 (2010) 359–384
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Journal of Financial Economics
journal homepage: www.elsevier.com/locate/jfec
The value of excess cash and corporate governance: Evidence from US cross-listings$ ´ Laurent Fresard a,Ã, Carolina Salva b,1
HEC School of Management, 1, Rue de la liberation, 78351 Jouy-en-Josas, Paris, France University of Neuchatel, Pierre-a-Mazel 7, 2000 Neuchˆtel, Switzerland a
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Article history: Received 18 September 2007 Received in revised form 9 March 2009 Accepted 9 April 2009 Available online 22 April 2010 JEL classiﬁcation: G15 G34 G31 Keywords: International cross-listing Corporate governance Cash holdings Liquidity
We examine whether and how a US cross-listing mitigates the risk that insiders will turn their ﬁrm’s cash holdings into private beneﬁts. We ﬁnd strong evidence that the value investors attach to excess cash reserves is substantially larger for foreign ﬁrms listed on US exchanges and over-the-counter than for their domestic peers. Further, we show that this excess-cash premium stems not only from the strength of US legal rules and disclosure requirements, but also from the greater informal monitoring pressure that accompanies a US listing. Overall, because investors’ valuation of excess cash mirrors how they expect the cash to be used, our analysis shows that a US listing constrains insiders’ inefﬁcient allocation of corporate cash reserves signiﬁcantly. & 2010 Published by Elsevier B.V.
1. Introduction When minority shareholders anticipate that those who control the ﬁrm, whom we call insiders, will exploit
$ We are grateful to Warren Bailey, Franc ois Degeorge, Michel Dubois, Vihang Errunza, Michel Habib, Dusan Isakov, Michael R. King, Kate ´ Litvak, Christian Leuz, Claudio Loderer, Erwan Morellec, Rene Stulz, Philip Valta, Masahiro Watanabe, Cynthia Van Hulle, an anonymous referee, and seminar participants at the European Finance Association 2007 annual meetings, the European Financial Management Association 2007 annual meetings, the ﬁfth Accounting Research Workshop BernFribourg 2007, University of Zurich, Tilburg University, Katholieke ¨ Universiteit Leuven, University of Antwerp, and the Bern Universitat 2006 Conference on Corporate Governance in Family/Unlisted ﬁrms for helpful comments. The paper has previously circulated under the title ‘‘Does cross-listing in the US really improve corporate governance? Evidence from the value of corporate liquidity’’. Ã Corresponding author. Tel.:+ 33 1 39 67 94 07; fax: + 33 1 39 67 70 85. ´ E-mail addresses: firstname.lastname@example.org (L. Fresard), email@example.com (C. Salva). 1 Tel.: + 41 32 718 14 07; fax: + 41 32 718 14 01.
some of its resources to derive private beneﬁts, they discount ﬁrm value. That is the main conclusion of the literature examining the interplay between ﬁrm value and corporate governance (see La Porta, Lopez-de-Silanes, Shleifer, and Vishny, 2002; or Durnev and Kim, 2005).2 Agency theories predict that the magnitude of the value shortfall depends not only on the existence and efﬁciency of mechanisms limiting the potential extraction of private beneﬁts, but also to a large extent on the availability of resources that can be easily diverted. Although many kinds of assets can be turned into private beneﬁts, Myers
2 La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1999) show that non-US ﬁrms are classically controlled by large shareholders. On this ground, studies on the determinants and consequences of private beneﬁts of control generally focus on the presence of large controlling shareholders as the source of agency conﬂicts. Yet corporate managers could also enjoy the private beneﬁts of control (see Benos and Weisbach, 2004). In this paper, we refer to ‘insiders’ to denote those who hold control of the ﬁrm’s decisions. In our setting, they can either be large shareholders or managers.
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