The relationship between judicial efficiency and corporate cash holdings: An international study

This study investigates the relationship between a nation's judicial efficiency – how quickly and inexpensively business cases are handled in that nation's courts – and its corporations' cash holdings over 43,644 firms in 66 countries between 1997 and 2012. We find that improved judicial efficiency is associated with higher levels of corporate cash holdings. This finding supports the managerial-fear hypothesis, where managers consider improvements in judicial efficiency as increasing the probability of bankruptcy and loss of their jobs, responding to this fear by hoarding extra cash as a buffer against bankruptcy. As added support to this conclusion, we find that the positive impact of judicial efficiency on cash holdings further increases for riskier firms (e.g., firms that are smaller, have less collateral, have greater research and development expenditures, and are faster-growing). The results also show that strengthening creditor rights increases corporate cash holdings, subject to the availability of efficient enforcement through the judicial systems. Our results are robust when using different estimation techniques, alternative measures of cash holdings and judicial efficiency, changing the sample period, and different samples, such as excluding countries with a higher density of observations.