Showing papers in "Journal of Banking and Finance in 2010"
TL;DR: This article examined the role of gold in the global financial system and found that gold is both a hedge and a safe haven for major European stock markets and the US but not for Australia, Canada, Japan and large emerging markets such as the BRIC countries.
Abstract: The aim of this paper is to examine the role of gold in the global financial system. We test the hypothesis that gold represents a safe haven against stocks of major emerging and developing countries. A descriptive and econometric analysis for a sample spanning a 30 year period from 1979 to 2009 shows that gold is both a hedge and a safe haven for major European stock markets and the US but not for Australia, Canada, Japan and large emerging markets such as the BRIC countries. We also distinguish between a weak and strong form of the safe haven and argue that gold may act as a stabilizing force for the financial system by reducing losses in the face of extreme negative market shocks. Looking at specific crisis periods, we find that gold was a strong safe haven for most developed markets during the peak of the recent financial crisis.
1,114 citations
TL;DR: In this paper, the authors compared conventional and Islamic banks and found no significant differences in business orientation, efficiency, asset quality, or stability, and found that conventional banks that operate in countries with a higher market share of Islamic banks are more cost-effective but less stable.
Abstract: This paper discusses Islamic banking products and interprets them in the context of financial intermediation theory. Anecdotal evidence shows that many of the conventional products can be redrafted as Sharia-compliant products, so that the differences are smaller than expected. Comparing conventional and Islamic banks and controlling for other bank and country characteristics, the authors find few significant differences in business orientation, efficiency, asset quality, or stability. While Islamic banks seem more cost-effective than conventional banks in a broad cross-country sample, this finding reverses in a sample of countries with both Islamic and conventional banks. However, conventional banks that operate in countries with a higher market share of Islamic banks are more cost-effective but less stable. There is also consistent evidence of higher capitalization of Islamic banks and this capital cushion plus higher liquidity reserves explains the relatively better performance of Islamic banks during the recent crisis.
888 citations
TL;DR: In this paper, the authors investigate the relationship between capital structure, ownership structure and firm performance using a sample of French manufacturing firms and employ nonparametric data envelopment analysis (DEA) methods to empirically construct the industry's best practice frontier and measure firm efficiency as the distance from that frontier.
Abstract: This paper investigates the relationship between capital structure, ownership structure and firm performance using a sample of French manufacturing firms. We employ non-parametric data envelopment analysis (DEA) methods to empirically construct the industry’s ‘best practice’ frontier and measure firm efficiency as the distance from that frontier. Using these performance measures we examine if more efficient firms choose more or less debt in their capital structure. We summarize the contrasting effects of efficiency on capital structure in terms of two competing hypotheses: the efficiency-risk and franchise-value hypotheses. Using quantile regressions we test the effect of efficiency on leverage and thus the empirical validity of the two competing hypotheses across different capital structure choices. We also test the direct relationship from leverage to efficiency stipulated by the Jensen and Meckling (1976) agency cost model. Throughout this analysis we consider the role of ownership structure and type on capital structure and firm performance.
714 citations
TL;DR: In this paper, the authors examined herding behavior in global markets and found evidence of herding in advanced stock markets (except the US) and in Asian markets, with the exception of the US and Latin American markets.
Abstract: This paper examines herding behavior in global markets. By applying daily data for 18 countries from May 25, 1988, through April 24, 2009, we find evidence of herding in advanced stock markets (except the US) and in Asian markets. No evidence of herding is found in Latin American markets. Evidence suggests that stock return dispersions in the US play a significant role in explaining the non-US market’s herding activity. With the exceptions of the US and Latin American markets, herding is present in both up and down markets, although herding asymmetry is more profound in Asian markets during rising markets. Evidence suggests that crisis triggers herding activity in the crisis country of origin and then produces a contagion effect, which spreads the crisis to neighboring countries. During crisis periods, we find supportive evidence for herding formation in the US and Latin American markets.
663 citations
TL;DR: The authors investigated how different degrees of market power affect bank efficiency and stability in the context of developing economies and found that an increase in market power leads to greater bank stability and enhanced profit efficiency, despite significant cost efficiency losses.
Abstract: This paper investigates how different degrees of market power affect bank efficiency and stability in the context of developing economies. It sheds light on the competition-stability nexus by documenting and analyzing the complex interactions between a tripod of variables that are central for regulators: the degree of market power, bank cost and profit efficiency, and overall firm stability. The results show that an increase in the degree of market power leads to greater bank stability and enhanced profit efficiency, despite significant cost efficiency losses. The findings lend empirical justification to the traditional view that increased competition may undermine bank stability, and may bear significant implications for stressed banking systems in developing economies.
612 citations
TL;DR: In this article, the authors use panel data from nine countries over the period 1996-2008 to test how revenue diversification affects bank value and find robust evidence against a conglomerate discount, unlike studies concerned with industrial firms.
Abstract: We use panel data from nine countries over the period 1996–2008 to test how revenue diversification affects bank value. Relying on a comprehensive framework for bank performance measurement, we find robust evidence against a conglomerate discount, unlike studies concerned with industrial firms. Rather, diversification increases bank profitability and, as a consequence also market valuations. This indirect performance effect does not depend on whether diversification was achieved through organic growth or through M&A activity. We further demonstrate that previous results in the literature on the impact of diversification on bank value presumably differ due to the way diversification is measured, and the negligence of the indirect value effect via bank profitability. Our evidence against a conglomerate discount in banking remains robust also during the sub-prime crisis.
455 citations
TL;DR: This article applied machine learning techniques to construct nonlinear nonparametric forecasting models of consumer credit risk, which significantly improved the classification rates of credit-card-holder delinquencies and defaults, with linear regression R2's of forecasted/realized delinquencies of 85%.
Abstract: We apply machine-learning techniques to construct nonlinear nonparametric forecasting models of consumer credit risk. By combining customer transactions and credit bureau data from January 2005 to April 2009 for a sample of a major commercial bank’s customers, we are able to construct out-of-sample forecasts that significantly improve the classification rates of credit-card-holder delinquencies and defaults, with linear regression R2’s of forecasted/realized delinquencies of 85%. Using conservative assumptions for the costs and benefits of cutting credit lines based on machine-learning forecasts, we estimate the cost savings to range from 6% to 25% of total losses. Moreover, the time-series patterns of estimated delinquency rates from this model over the course of the recent financial crisis suggest that aggregated consumer credit-risk analytics may have important applications in forecasting systemic risk.
390 citations
TL;DR: In this article, the authors investigate whether loan growth affects the riskiness of individual banks in 16 major countries using bankscope data from more than 16,000 individual banks during 1997-2007.
Abstract: We investigate whether loan growth affects the riskiness of individual banks in 16 major countries. Using Bankscope data from more than 16,000 individual banks during 1997-2007, we test three hypotheses on the relation between abnormal loan growth and asset risk, bank profitability, and bank solvency. We find that loan growth leads to an increase in loan loss provisions during the subsequent three years, to a decrease in relative interest income, and to lower capital ratios. Further analyses show that loan growth also has a negative impact on the risk-adjusted interest income. These results suggest that loan growth represents an important driver of the riskiness of banks.
346 citations
TL;DR: This paper investigated the effects of focus versus diversification on bank performance using data on Chinese banks during the 1996-2006 period and found that diversification is associated with reduced profits and higher costs.
Abstract: This paper investigates the effects of focus versus diversification on bank performance using data on Chinese banks during the 1996–2006 period. We construct a new measure, economies of diversification, and compare the results to those of the more conventional focus indices, which are based on the sum of squares of shares in different products or regions. Diversification is captured in four dimensions: loans, deposits, assets, and geography. We find that all four dimensions of diversification are associated with reduced profits and higher costs. These results are robust regardless of alternative measures of diversification and performance. Furthermore, we observe that banks with foreign ownership (both majority and minority ownership) and banks with conglomerate affiliation are associated with fewer diseconomies of diversification, suggesting that foreign ownership and conglomerate affiliation may play important mitigating roles. This analysis may provide important implications for bank managers and regulators in China as well as in other emerging economies.
324 citations
TL;DR: The authors found that higher capital adequacy and liquidity ratios have a marked effect on the crisis probabilities, implying long-run benefits to offset some of the costs that such regulations may impose.
Abstract: Early warning systems (EWS) for banking crises generally omit bank capital, bank liquidity and property prices. Most work on EWS has been for global samples dominated by emerging market crises where time series data on bank capital adequacy and property prices are typically absent. We estimate logit crisis models for OECD countries, finding strong effects from capital adequacy and liquidity ratios as well as property prices, and can exclude traditional variables. Higher capital adequacy and liquidity ratios have a marked effect on the crisis probabilities, implying long-run benefits to offset some of the costs that such regulations may impose.
321 citations
TL;DR: In this paper, the authors construct a stakeholder welfare score measuring the extent to which firms meet the expectation of their non-shareholder stakeholders (such as employees, customers, communities, and environment), and find it to be associated with positive valuation effects.
Abstract: Using data from the independent social choice investment advisory firm Kinder, Lydenberg, Domini (KLD), we construct a stakeholder welfare score measuring the extent to which firms meet the expectation of their non-shareholder stakeholders (such as employees, customers, communities, and environment), and find it to be associated with positive valuation effects: an increase of 1 in the stakeholder welfare score leads to an increase of 0.587 in Tobin’s Q . Furthermore, the valuation effects vary across stakeholders and the aforementioned positive effects are driven by firms’ performance on employee relations and environmental issues. These results suggest that stakeholder welfare (in particular, employee welfare and environmental performance) represents intangibles (such as reputation or human capital) crucial for shareholder value creation rather than private benefits managers pursue for their own social or economic needs.
TL;DR: In this paper, the authors examined the impact of bank ownership concentration on two indicators of bank riskiness, namely banks' non-performing loans and capital adequacy, using balance sheet information for around 500 commercial banks from more than 50 countries averaged over 2005-2007.
Abstract: This paper examines the impact of bank ownership concentration on two indicators of bank riskiness, namely banks’ non-performing loans and capital adequacy. Using balance sheet information for around 500 commercial banks from more than 50 countries averaged over 2005–2007, we find that concentrated ownership (proxied by different levels of shareholding) significantly reduces a bank’s non-performing loans ratio, conditional on supervisory control and shareholders protection rights. Furthermore, ownership concentration affects the capital adequacy ratio positively conditional on shareholder protection. At low levels of shareholder protection rights and supervisory control, ownership concentration reduces bank riskiness.
TL;DR: In this article, the authors analyzed survey evidence from 692 fund managers in five countries, the vast majority of whom rely on technical analysis, and found that technical analysis is the most important form of analysis and up to this horizon it is thus more important than fundamental analysis.
Abstract: The use of technical analysis by financial market professionals is not well understood. This paper thus analyzes survey evidence from 692 fund managers in five countries, the vast majority of whom rely on technical analysis. At a forecasting horizon of weeks, technical analysis is the most important form of analysis and up to this horizon it is thus more important than fundamental analysis. Technicians are as experienced, as educated, as successful in their career and largely just as overconfident in decision-making as others. However, technical analysis is somewhat more popular in smaller asset management firms. What we find most significant is the relation of technical analysis with the view that prices are heavily determined by psychological influences. Consequently, technicians apply trend-following behavior.
TL;DR: In this paper, the authors examined the role of culture and individualism in the foreign bias in international asset allocation and found that the degree of cultural distance between two countries affects the amount of money allocated to that market.
Abstract: This paper examines the foreign bias in international asset allocation Following extant literature in behavioral finance, we argue that a society’s culture and the cultural distance between two markets play an important role in explaining the foreign bias In particular, we hypothesize that the degree of a nation’s uncertainty avoidance affects the foreign bias (more uncertainty-avoiding countries allocate less to foreign markets), as does the degree of a country’s individualism (in individualistic countries performance is more directly attributed to a person and less to teams, causing these individuals to be more aggressive in their foreign asset allocations) We further expect that the degree of cultural distance between two countries affects the amount of money allocated to that market Based on extensive robustness analyses, we find support for our hypotheses on the role of culture in international asset allocation
TL;DR: In this paper, the effect of monetary news on sentiment depends on market conditions (bull versus bear market) and investor sentiment, and monetary policy actions in bear market periods have a larger effect on stocks that are more sensitive to changes in investor sentiment and credit market conditions.
Abstract: This paper shows that monetary policy decisions have a significant effect on investor sentiment. The effect of monetary news on sentiment depends on market conditions (bull versus bear market). We also find that monetary policy actions in bear market periods have a larger effect on stocks that are more sensitive to changes in investor sentiment and credit market conditions. Overall, the results show that investor sentiment plays a significant role in the effect of monetary policy on the stock market.
TL;DR: In this article, the relevance of non-traditional activities in the estimation of bank efficiency levels using a sample of 752 publicly quoted commercial banks from 87 countries around the world, allowing comparison of the impact of such activities under different levels of economic development, geographical regions and other country characteristics.
Abstract: This paper investigates the relevance of non-traditional activities in the estimation of bank efficiency levels using a sample of 752 publicly quoted commercial banks from 87 countries around the world, allowing comparison of the impact of such activities under different levels of economic development, geographical regions and other country characteristics. We estimate both cost and profit efficiency of banks using a traditional function that considers loans and other earnings assets as the only outputs, and two additional functions to account for non-traditional activities, one with off-balance sheet (OBS) items and the other with non-interest income as an additional output. Controlling for cross-country differences in regulatory and environmental conditions, we find that, on average, cost efficiency increases irrespective of whether we use OBS or non-interest income, although the results for profit efficiency are mixed. Our results also reveal that while the inclusion of non-traditional outputs does not alter the directional impact of environmental variables on bank inefficiency, regulations that restrict bank activities and enhance monitoring and supervision provisions improve both cost and profit efficiency. © 2010 Elsevier B.V.
TL;DR: In this article, the authors investigate the association between corporate firm performance and the level and stability of institutional ownership within a simultaneous equation model and find that stable shareholding of each group has a positive impact on performance, with the first group exerting a larger effect.
Abstract: We investigate the association between corporate firm performance and the level and stability of institutional ownership within a simultaneous equation model. Our main ownership stability measures include ownership persistence and the time-lengths over which investors hold non-zero shares or maintain their shareholding. We find that there is a positive relationship between firm performance and institutional ownership stability, accounting for the shareholding proportion. This relationship is robust to the employment of ownership turnover measures used in the literature and consistent with the view that stable institutional investors play an effective role in monitoring. When we disaggregate institutional investors into pressure-insensitive and pressure-sensitive categories, we find that stable shareholding of each group has a positive impact on performance, with the first group exerting a larger effect. The channels of the effect include, but are not limited to, decreased information asymmetry and increased incentive-based compensation.
TL;DR: The Federal Reserve's unconventional monetary policy announcements in 2008-2009 substantially reduced international long-term bond yields and the spot value of the dollar as mentioned in this paper, and the jump depreciations of the USD are fairly consistent with estimates of the impacts of previous equivalent monetary policy shocks.
Abstract: The Federal Reserve’s unconventional monetary policy announcements in 2008–2009 substantially reduced international long-term bond yields and the spot value of the dollar. These changes closely followed announcements and were very unlikely to have occurred by chance. A simple portfolio choice model can produce quantitatively plausible changes in U.S. and foreign excess bond yields. The jump depreciations of the USD are fairly consistent with estimates of the impacts of previous equivalent monetary policy shocks. The policy announcements do not appear to have reduced yields by reducing expectations of real growth. Unconventional policy can reduce international long-term yields and the value of the dollar even at the zero bound.
TL;DR: In this article, the relevance of the gender of the contracting parties involved in lending has been studied and it was shown that female entrepreneurs face tighter credit availability than their male counterparts, even though they do not pay higher interest rates.
Abstract: In this paper we study the relevance of the gender of the contracting parties involved in lending. We show that female entrepreneurs face tighter credit availability, even though they do not pay higher interest rates. The effect is independent of the information available about the borrower and holds if we control for unobservable individual effects. The gender of the loan officer is also important: we find that female officers are more risk-averse or less self-confident than male officers as they tend to restrict credit availability to new, un-established borrowers more than their male counterparts.
TL;DR: In this article, the authors study both the level of value-at-risk (VaR) disclosure and the accuracy of the disclosed VaR figures for a sample of US and international commercial banks.
Abstract: In this paper we study both the level of Value-at-Risk (VaR) disclosure and the accuracy of the disclosed VaR figures for a sample of US and international commercial banks. To measure the level of VaR disclosures, we develop a VaR Disclosure Index that captures many different facets of market risk disclosure. Using panel data over the period 1996–2005, we find an overall upward trend in the quantity of information released to the public. We also find that Historical Simulation is by far the most popular VaR method. We assess the accuracy of VaR figures by studying the number of VaR exceedances and whether actual daily VaRs contain information about the volatility of subsequent trading revenues. Unlike the level of VaR disclosure, the quality of VaR disclosure shows no sign of improvement over time. We find that VaR computed using Historical Simulation contains very little information about future volatility.
TL;DR: The authors empirically examined the impact of the interaction between market and default risk on corporate credit spreads using credit default swap (CDS) spreads, and found that average credit spreads decrease in GDP growth rate, but increase in nominal GDP growth volatility and jump risk in the equity market.
Abstract: This study empirically examines the impact of the interaction between market and default risk on corporate credit spreads. Using credit default swap (CDS) spreads, we find that average credit spreads decrease in GDP growth rate, but increase in GDP growth volatility and jump risk in the equity market. At the market level, investor sentiment is the most important determinant of credit spreads. At the firm level, credit spreads generally rise with cash flow volatility and beta, with the effect of cash flow beta varying with market conditions. We identify implied volatility as the most significant determinant of default risk among firm-level characteristics. Overall, a major portion of individual credit spreads is accounted for by firm-level determinants of default risk, while macroeconomic variables are directly responsible for a lesser portion.
TL;DR: This article explored the effect of governance on bond yield-spreads and ratings in a multinational sample of firms and found strong evidence that ultimate ownership (i.e., the voting/cash-flow rights wedge) and family control have a positive and significant effect on bond yields and ratings.
Abstract: We explore the effect of governance on bond yield-spreads and ratings in a multinational sample of firms. We find strong evidence that ultimate ownership (i.e., the voting/cash-flow rights wedge) and family control have a positive and significant effect on bond yield-spreads, and a negative and significant effect on bond ratings. Control in the hands of widely held financial firms has a positive effect on bond ratings only , while State control has no effect on either bond yield-spreads or ratings. We also find that a higher protection of debtholders’ rights generally reduces bond yield-spreads and increases bond ratings. Our results additionally show that, for both bondholders and rating agencies, the enforcement of debt laws is crucially important. Finally, we document a negative effect of debt covenants on debt costs when there is a high expropriation risk and poor creditor rights protection.
TL;DR: In this article, a broad efficiency comparison of 6462 insurers from 36 countries is conducted, considering life and non-life insurers, and they find a steady technical and cost efficiency growth in international insurance markets from 2002 to 2006.
Abstract: The purpose of this paper is to provide new empirical evidence on frontier efficiency measurement in the international insurance industry, a topic of great interest in the academic literature during the last several years. A broad efficiency comparison of 6462 insurers from 36 countries is conducted. Different methodologies, countries, organizational forms, and company sizes are compared, considering life and non-life insurers. We find a steady technical and cost efficiency growth in international insurance markets from 2002 to 2006, with large differences across countries. Denmark and Japan have the highest average efficiency, whereas the Philippines is the least efficient. Regarding organizational form, the results are not consistent with the expense preference hypothesis, which claims that mutuals should be less efficient than stocks due to higher agency costs. Only minor variations are found when comparing different frontier efficiency methodologies (data envelopment analysis, stochastic frontier analysis).
TL;DR: In this article, the authors analyzed the value discount associated with disproportional ownership structures in a large sample of European firms and found higher value discount in family firms, in firms with low cash flow concentration, and in industries with higher amenity value.
Abstract: In a large sample of European firms we analyze the value discount associated with disproportional ownership structures first documented by Claessens et al. (2002). Consistent with a theoretical model of incentive and entrenchment effects, we find higher value discount in family firms, in firms with low cash flow concentration, and in industries with higher amenity value. Furthermore, the discount is higher in countries with good investor protection and higher for dual class shares than for pyramids. We find no impact on operating performance, likelihood of bankruptcy, dividend policy, or growth. Finally, we discuss policy implications of these findings.
TL;DR: In this article, the authors examined the performance of trend-following trading strategies in commodity futures markets using a monthly dataset spanning 48 years and 28 markets, and found that all parameterizations of the dual moving average crossover and channel strategies that they implement yield positive mean excess returns net of transactions costs in at least 22 of the 28 markets.
Abstract: This paper examines the performance of trend-following trading strategies in commodity futures markets using a monthly dataset spanning 48 years and 28 markets. We find that all parameterizations of the dual moving average crossover and channel strategies that we implement yield positive mean excess returns net of transactions costs in at least 22 of the 28 markets. When we pool our results across markets, we show that all of the trading rules earn hugely significant positive returns that prevail over most subperiods of the data as well. These results are robust with respect to the set of commodities the trading rules are implemented with, distributional assumptions, data-mining adjustments and transactions costs, and help resolve divergent evidence in the extant literature regarding the performance of momentum and pure trend-following strategies that is otherwise difficult to explain.
TL;DR: In this paper, the authors analyzed the bank and country determinants of capital buffers using a panel data of 1337 banks in 70 countries between 1992 and 2002 and found that capital buffers are positively related to the cost of deposits and bank market power, although the relations vary across countries depending on regulation, supervision, and institutions.
Abstract: This paper analyzes the bank and country determinants of capital buffers using a panel data of 1337 banks in 70 countries between 1992 and 2002. After controlling for adjustment costs and the endogeneity of explanatory variables, the results show that capital buffers are positively related to the cost of deposits and bank market power, although the relations vary across countries depending on regulation, supervision, and institutions. Their impact is the result of two generally opposing effects: restrictions on bank activities and official supervision reduce the incentives to hold capital buffers by weakening market discipline, but at the same time they promote higher capital buffers by increasing market power. Institutional quality has the two opposite effects. Better accounting disclosure and less generous deposit insurance, however, have a clear positive effect on capital buffers by both strengthening market discipline and making charter value better able to reduce risk-taking incentives.
TL;DR: This paper examined whether firms take these costs into account when deciding on the optimal amount of leverage and found that firms with leading track records in employee well-being significantly reduce the probability of bankruptcy by operating with lower debt ratios.
Abstract: Employees of liquidating firms are likely to lose income and non-pecuniary benefits of working for the firm, which makes bankruptcy costly for employees. This paper examines whether firms take these costs into account when deciding on the optimal amount of leverage. We find that firms with leading track records in employee well-being significantly reduce the probability of bankruptcy by operating with lower debt ratios. Moreover, we observe that firms with better employee track records have better credit ratings, even when we control for differences in firm leverage.
TL;DR: In this article, the effect of sovereign credit rating change announcements on the CDS spreads of the event countries and their spillover effects on other emerging economies' CDS premiums was examined.
Abstract: This paper examines the effect of sovereign credit rating change announcements on the CDS spreads of the event countries, and their spillover effects on other emerging economies’ CDS premiums. We find that positive events have a greater impact on CDS markets in the two-day period surrounding the event, and are more likely to spill over to other emerging countries. Alternatively, CDS markets anticipate negative events, and previous changes in CDS premiums can be used to estimate the probability of a negative credit event. The transmission mechanisms for positive events are the common creditor and competition in trade markets.
TL;DR: The authors showed that household credit growth raises debt levels without much effect on long-term income and that rapid household credit expansions generate vulnerabilities that can precipitate a banking crisis, but the effect is tempered by the associated increase in income.
Abstract: Private credit expansions are an important predictor of subsequent banking crises We revisit that result with a new dataset from developed and developing countries that decomposes private credit into household credit and enterprise credit We argue that household credit growth raises debt levels without much effect on long-term income Rapid household credit expansions generate vulnerabilities that can precipitate a banking crisis Enterprise credit expansions can have the same effects but it is tempered by the associated increase in income Our estimates show that household credit expansions have been a statistically and economically significant predictor of banking crises Enterprise credit expansions are also associated with banking crises but their effect is weaker and less robust
TL;DR: In this paper, the authors investigated the market value of corporate cash holdings in connection with firm-specific and time-varying information asymmetry and found that the value of such holdings is lower in states with a higher degree of information asymmetric.
Abstract: This study investigates the market value of corporate cash holdings in connection with firm-specific and time-varying information asymmetry. Analyzing a large international sample, we test two opposing hypotheses. According to the pecking order theory, adverse selection problems make external financing costly and imply a higher market value of a marginal dollar of cash in states with higher information asymmetry. In contrast, the free cash flow theory predicts that excessive cash holdings bundled with higher information asymmetry generate moral hazard problems and lead to a lower market value of a marginal dollar of cash. We use the dispersion of analysts’ earnings per share forecasts as our main measure of firm-specific and time-varying information asymmetry. Extending the valuation regressions of Fama and French [Fama, E.F., French, K.R., 1998. Taxes, financing decisions, and firm value. Journal of Finance 53, 819–843], our results support the free cash flow theory and indicate that the value of corporate cash holdings is lower in states with a higher degree of information asymmetry.