Academy of Accounting and Financial Studies Journal (Print ISSN: 1096-3685; Online ISSN: 1528-2635)


The Impact of the Strength of Legal Rights on Cash Holdings: Evidence from an Emerging Market

Author(s): Hoang Duc Le, Long Phi Tran, Hang Minh Vu

This paper investigates the impact of the strength of legal rights on cash holdings. An increase in legal rights can facilitate corporate lending and therefore reducing companies’ need of holding cash. Using a sample consisting of Vietnamese listed companies from 2012 to 2019, we show that strong legal rights can lead to a decrease in the level of corporate cash holdings. This result is robust when we use alternative measures of corporate cash holdings or when we use different econometric models to deal with endogeneity problems. Moreover, our results indicate that the negative relationship between legal rights and corporate cash holdings exists only when firms have positive retained earnings. One of the explanations may be because only firms with positive retained earnings are able to access the source of bank financing and therefore can reduce the need of holding cash. Given that a company can have a high opportunity costs when holding a high level of cash, our paper suggests that regulators should have policies that increase the legal rights so that companies can reduce the cash holdings.

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