Away from prying eyes - what do remotely-located firms do with their cash
The location of a firm is an important consideration for investors. This research looks at how distance affects their ability to monitor an organisation's cash management, and how it may encourage abuse of cash holdings within.
The geographic location of a firm remains an important factor for both individuals and institutions considering where to invest their money. Studies have shown that investors are more likely to favour nearby firms within reach of their oversight. Traditionally cautious Venture Capitalists in North America, for example, are known to favour investments that can be reached within a 20 minute drive. Close proximity to a firm's location is believed to improve an investor's access to company information and its ability to participate in decision-making.
This research looks at how distance affects the ability of investors to monitor an organisation's cash management, and how that distance away from investor observation may encourage those inside the organisation to abuse cash holdings for their own personal benefit. The researchers test the conjecture that when outside of close investor scrutiny, those inside the company may choose to accumulate cash rather than spend it on investments or shareholder dividends, creaming the excess off for private consumption.
The study examined a sample of 4,111 observations of publicly listed French firms over a period extending from 1998 to 2007. It was found that that the controlling shareholder can indeed accumulate and convert cash into private benefits, in this case when their firms are headquartered outside the Paris region. The more geographically remote the organisation, the less observability of managerial actions, the greater the inclination of the controlling shareholders to accumulate cash. The presence of a large separation of cash-flow rights and control rights only amplifies this.
While the evidence produced is limited to the French examples, the study does highlight a matter that could be of significant concern to shareholders and investors, and further research could demonstrate if this is a global trend rather than one that is country dependent.
A draft version of the research paper is available for download at the link below. The final version of the research was published in the International Review of Financial Analysis.