4. Conclusion
In the presence of contracting frictions and limited enforceability, tangible assets are conventionally demanded by external capital providers as collateral against borrowing. The decline of tangible capital on corporate balance sheets in recent decades could limit firms’ debt capacity and compel cash hoarding. Stiff cash policy is costly as excess cash reserve is often accumulated at the expense of forgoing investment opportunities. Therefore, the cash cost of tangibility has significant implications on corporate policies and country-level economic growth. In light of the rising importance of intangible capital in corporate asset portfolio, it is of great importance to understand how the development of a country’s financial system shapes corporate cash reserves and investment decisions through the channel of tangible assets.
Using data covering 45 countries from 1990 to 2013, we find strong evidence that financial development reduces the sensitivity of cash holdings to asset tangibility. Our findings also highlight that institutions, which enhance financial development in terms of better creditor rights and transparency, alleviate cash-tangibility sensitivity. Furthermore, we show that financial development promotes investment made by firms with fewer tangible assets, and allows lowtangibility industries to grow faster. Our results further the understanding of the determinants of cash holdings by showing that country-level factors (e.g., financial development and institutional quality) could interact with firm-specific characteristics in shaping corporate cash policy.
