Transcript legal

Discussion on:
The Determinants of Corporate Cash
Management Policy:
Evidence From Around the World
By Y. Kusnadi and K. C. J. Wei
December 12, 2008
Discussant: Jungwon Suh
Ewha Womans University
0
Summary
 The
paper documents evidence that the
following two sensitivities are affected by legal
protection of minority investors.
 Cash-flow
sensitivity of cash holdings
 Stock price sensitivity of cash holdings
1
Suggestion
 The
introduction need to elaborate more about
cash-stock price sensitivities.
Motivation?
 Implications of empirical findings?

2
Relation to Khurana et al. (2006)
 Khurana
et al. document that there is a negative
relation between financially development and
cash-cash flow sensitivities.
 LLSV
(1997, “Legal determinants of external
finance) find that investor protection is
negatively correlated with the size of capital
markets (i.e., financial development).
3
Relation to Khurana et al. (2006)
 Legal
protection and financial development go
hand in hand.
 Some
might wonder whether the current study
is examining what Khurana et al. already
looked at.
4
Motivation behind Cash-Stock Price
Sensitivities
 The
idea is that under good legal protection,
stock price reflects future investment
opportunities better.
 The
authors also argue that firms will hoard
cash in anticipation of future investment
opportunities.
 The
authors are testing a joint hypothesis.
5
Empirical Scheme
 The
study pools all observations into one
regression model with a cash flow-legal
protection interaction term.
A
supplementary analysis might be interesting
as in Love (2003) Figure 1.
6
We might want to see the following
Cash-cash flow
sensitivities
FR







US


Legal Protection
7
Economic significance of result
 Yes,
CF×Legal enters significantly with a
positive sign.
 Is
the effect economically significant?
8
Economic significance of result
 What
would be the impact of a one-standarddeviation change in LEGAL on Δ(Cash
Holdings)?
 Let’s
hold other variables constant.
9
Economic significance of result

Mean value of Δ(Cash Holdings) = 0.0007
α6 = 0.0013 & α11 = -0.0099 (Table 4, reg (2))
 Mean value of CF = 0.0618
 Mean value of LEGAL = 3.05
 Standard deviation of LEGAL = 1.31

The above expression is roughly equal to 0.0009015
for an one standard deviation increase in LEGAL.
10
Economic significance of result
 What
do we find?
One standard-deviation change in LEGAL leads to
a nonneligible change in Δ(Cash Holdings).
0.0009015 / σ(Δ(Cash Holdings)) = 14%
However, the overall impact of LEGAL on
Δ(Cash Holdings) is positive!!! Puzzling.
11