Neglected disciplinary effects of investor relations: evidence from corporate cash holdings

Abstract

We examine whether, and how, investor relations (IR) quality affects managerial malfeasance by exploring the potential effects on the value, accumulation, and uses of cash holdings. Using European data, we find that an increase in the IR quality rank from the lower quartile to the upper quartile raises the marginal value of cash, on average, by €0.40 to €0.69. The effect is more pronounced for firms with weaker (stronger) external (internal) governance structures. We further document an inverted J-shaped relationship between IR quality and the propensity of firms to hoard cash. Specifically, higher-quality IR initially constrain the propensity of firms to accumulate cash; however, the effect is partially reversed as IR quality rank exceeds 0.69. Cash-rich firms with lower-rated IR programs are also more likely to dissipate cash through value-decreasing capital expenditures. Unexpectedly, IR quality seems not to matter for acquisitions and R&D spending nor for repurchases. Instead, IR quality has a negative impact on the propensity of firms to pay dividends, which attests to the shareholder power hypothesis. Overall, we show that higher-quality IR are a market-based approach to increased investor protection that effectively constrain both the profusion and insiders’ negligent allocation of corporate liquid assets. Actually, visibility improves firm transparency, making possible processes of managerial subjection to investor rights.