Access Type

Open Access Dissertation

Date of Award

January 2011

Degree Type


Degree Name




First Advisor

Mai Iskandar-Datta


This dissertation is composed of two distinct chapters. The first chapter is concerned with the secular trends in corporate cash holdings and the determinants of the changing cash policies for seven industrialized countries--Australia, Canada, France, Germany, Japan, the US, and UK. In the first chapter, we document that a pronounced secular upward trend in cash holdings is almost systemic across sample countries over 1991-2008, with France exhibiting a modest rise and Japan a substantial decline. However, the driving forces underlying the cash pattern are not uniform across countries. While the evolution in firm characteristics necessitated elevated cash balances, the time-varying firm attributes explain the cash pattern only in Canada, France, UK and the US. The agency motive plays a role in the rise in cash balances in Germany, consistent with the perspective that agency problems of cash holdings primarily manifest in countries with weak external governance. My analysis highlights that the functioning of the financial system is crucial to corporate cash policy as Australia's cash pattern is driven by shallow private credit markets that curbed cash reserves during the earlier period of our study and the decelerating cash trend in Japan is ascribed to financial reforms that eliminated rent-extraction opportunities by banks. While I document some commonality in the determinants of cash policies, some determinants are employed differently by the various countries indicating divergence in cash practices.

The second chapter focuses on the deployment of cash and the resulting effects on firms' operating performance in an international context. Using a large sample from 41 countries, I provide new and compelling evidence that firms under weak external governance structures hold less cash than firms operating under strong governance regimes, contrary to previous literature. Consistent with managerial empire building prediction, my study reveals that firms deplete their excess cash by overinvesting and this effect is exacerbated in countries with weak governance. The result of greater sensitivity of investments to excess cash support agency costs rather than financing constraint explanation. The depletion of excess cash has an adverse impact on firm performance, especially in countries with weak investor protection. These findings are significant because they imply that the agency conflict of cash holdings primarily lies in the misallocation of capital, not in its accumulation.