State Expropriation Risk and Ownership Structure: Evidence From Cash Holdings Around the World

ABSTRACT Research Question/Issue Does the interaction of ownership structure and state expropriation risk affect corporate cash holdings? We address this question by assessing whether corporate ownership structure can amplify or mitigate the effect of greater state expropriation risk, captured by country‐level corruption, on cash. Research Findings/Insights Using all publicly listed firms (circa 52,000 firms) from 87 countries over a 20‐year period, we show that the interaction of corruption with ownership structure has a first‐order effect on firms' cash holdings. Greater corruption leads firms to reduce cash holdings to mitigate the risk of expropriation by the state. This effect is stronger for diffuse ownership firms, which are more susceptible to the risk of expropriation by insiders and the state relative to concentrated ownership firms. We also find that compared with concentrated ownership firms, diffuse firms with more cash respond to corruption increases by making larger dividend payouts and investments in illiquid assets, thus sheltering cash from expropriation. Theoretical/Academic Implications We test the “twin agency” theoretical prediction of Stulz, suggesting that the effect of state expropriation on firms is heterogenous across different ownership structures and that greater corruption increases the risk of expropriation more for diffused vis‐à‐vis concentrated ownership firms. We also show that ownership concentration and corruption have a twin effect on corporate cash holdings. Practitioner/Policy Implications We show that ownership structure, corruption, and their interaction are important determinants of corporate cash. Hence, the associated conflicts between controlling and minority investors can shape firms' liquidity management.