The Effects of Firm- and Country-level Governance Mechanisms on Dividend Policy, Cash Holdings, and Firm Value: A Cross-country Study

Abstract

This study examines the effects of firm and country-level corporate governance mechanisms on dividend and cash holding policies and their joint impact on firm value using a sample of over 3,000 listed firms from 21 countries. Using multivariate regression analyses, I find that at the firm-level, the excess control held by the largest owner is (1) negatively related to dividend payment; (2) positively related to cash holdings; and (3) negatively related to Tobin's Q; furthermore, I find positive valuation effects of dividends and cash holdings. However, these effects depend on the ownership structure of the firm. Dividend payments have incremental positive valuation effect for firms with entrenched owners while cash holdings have negative valuation effect for this type of firms. Considering the endogenous nature of firm policies, I then use a simultaneous equations model to test the interdependence of firm policy choices and firm value. The results indicate that these policies are interrelated and jointly affect firm value. Using the legal protection of investor as a proxy for country-level corporate governance mechanism, I find that firms operating in countries with poor investor protections make low dividend payments, have high cash holdings, and have low firm value, supporting the findings of La Porta, Lopez-de-Silanes, Shleifer, and Vishny (2000a, 2002) and Dittmar et al. (2003). In addition, I find that investor protection mitigates the adverse effect of excess control by forcing controlling shareholders to disgorge cash. High cash holding is beneficial only if outside investors rights are well protected.