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Investor protection and resource allocation: International evidence

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  • Huang, Yuan
  • Li, Xiao
  • Wei, K.C. John

Abstract

We use a multi-period equation system to examine how international manufacturing firms allocate internally generated operating cash flow to different uses. With one dollar increase in operating cash flow, firms use about half to reduce external financing and about a quarter to increase cash balances. Another quarter or so is spent on investment and only a tiny portion is paid out as dividends. Furthermore, firms in countries with strong investor protection save less out of operating cash flow and retire more external financing, especially the equity. Additional analysis reveals that the cost of equity capital is lower in firms retiring more external funds and/or saving less. Our study provides a new perspective to evaluate the fund allocation decisions of international firms.

Suggested Citation

  • Huang, Yuan & Li, Xiao & Wei, K.C. John, 2021. "Investor protection and resource allocation: International evidence," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 625-645.
    • Handle: RePEc:eee:reveco:v:75:y:2021:i:c:p:625-645
    DOI: 10.1016/j.iref.2021.04.017
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Fund allocation; Cash flow sensitivities; Investor protection; International finance;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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