Geographic location, excess control rights, and cash holdings

- We study the relation between geographic location of firms and their cash holdings.
- We examine the role of excess control rights in the effect of geography on cash.
- We find that distance to metropolitan areas positively affects cash holdings.
- This relation is more pronounced when excess control rights are high.
- Distance implies agency problems, particularly when excess control rights are high.

We assess the extent to which remotely-located firms are likely to discretionarily accumulate cash rather than distribute it to shareholders. We consider that these firms are less subject to shareholder scrutiny and, thus, will have high agency conflicts as the distance will facilitate the extraction of private benefits. Consistent with our predictions, we find a positive relation between the distance to the main metropolitan area and cash holdings, and this impact is more pronounced when the controlling shareholder has high levels of excess control rights (i.e., separation of cash-flow rights and control rights). Our results hold even after accounting for all control variables, including financial constraints, and suggest that geographic remoteness can be conducive to severe agency problems, particularly when there is a large separation of cash-flow rights and control rights.