International Evidence on the Relationship Between Financial Literacy and Corporate Cash Holdings

ABSTRACT This study is the first investigation of the relationship between corporate cash holdings and financial literacy (FL). We find that a one‐standard‐deviation increase in FL is associated with an 8%–27% reduction in corporate cash holdings, depending on the measure of FL used. Moreover, higher FL reduces the market value of excess cash, indicating that financially literate environments discourage value‐destroying cash accumulation. The results remain robust across alternative definitions of FL and cash holdings, estimation methods, and country subsamples. We further rule out the influence of endogeneity, refinancing risk, and variation in cash needs. Additional analyses identify agency costs as the primary channel through which FL affects corporate liquidity policies. The evidence suggests that financial literacy mitigates the agency motive for holding cash and serves as an effective substitute for monitoring opportunistic firm behavior when formal country governance structures are weak.