The Value of Excess Cash and Corporate Governance Evidence from Us Cross Listing

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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
a b

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

a r t i c l e in fo
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

abstract
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: fresard@hec.fr (L. Fresard), carolina.salva@unine.ch (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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