How creditor rights affect the value of cash: A cross-country study

- We examine how creditor rights affect the value of cash across countries.
- When creditor protection is weaker, the marginal value of cash is higher.
- Marginal investment is more valuable when legal protection of creditors is weak.
- Weak creditor rights create underinvestment among cash poor firms.
- Weak creditor rights alleviate agency problems among cash rich firms.

We examine how legal protection of creditors affects the value of cash across countries. We find that the marginal value of cash is considerably higher in countries with weak creditor rights. Creditor rights are at least as relevant as shareholder rights, which other studies have found to be an important factor affecting various corporate policies. In addition, we find that marginal investment is more valuable for firms in countries with weak creditor rights. This combines the findings of previous studies that weak creditor protection makes firms financially constrained and that cash is more valuable for financially constrained firms. Subsample analysis suggests that financial constraints generated by weak creditor rights create underinvestment among cash starved firms but alleviate agency conflicts among cash rich firms. Further analysis reveals that good country governance complements laws protecting creditors in cash valuation.