Levels of Liquid Assets and Enterprise Outcomes: The Case of Smaller Firms Based Abroad

ABSTRACTWe elaborate on the determinants and performance prospects of liquid assets (cash and short-term investments) of smaller firms that are based abroad. We propose that smaller firms, for different reasons, may hold more liquid assets. Our contention also is that liquid asset holdings of cross-listed (noncross-listed) smaller enterprises may be directly (inversely) associated with firm performance. Moreover, the gap in performance may be greater between cross-listed versus noncross-listed enterprises of emerging countries compared to the gap in performance of cross-listed versus noncross-listed enterprises of developed nations.INTRODUCTIONScholars have recognized that executives ordinarily have information about their enterprise that external investors do not have (Sanders and Carpenter, 2003; Kang and Kim, 2010; Reuer, Tong, and Wu, 2013). This problem of information asymmetry, when one actor to an exchange has information that the other does not (Spence, 1973, 1974), may be particularly acute in the case of smaller businesses that are based abroad. If those firms are only listed on overseas exchanges, they are perceived to have greater information asymmetry. That is because, relative to U.S. exchanges, overseas exchanges have inferior investor guardian mechanisms due to lower levels of shareholder protection, poorer accounting disclosure requirements, and less transparent stock market trading conditions (Doidge, Karolyi, and Stulz, 2004, 2006; Aggarwal, Erel, Stulz, and Williamson, 2009). Such shortcomings limit greater scrutiny by expert analysts, outside investors, and government authorities. Given these shortcomings, agency conflicts may become more intense (Jensen and Meckling, 1976). Since managers have firm-specific information pertinent to the enterprise which may not be known to market participants, the efficiency of utilization of corporate assets may be questioned. Specifically, due to agency conflicts, it may be questioned whether firm assets will be used to enhance the interests of executives rather than owners (Jensen and Meckling, 1976; Wright, Kroll, and Elenkov, 2002).In the presence of information asymmetry, market participants search for signals that may provide insight into the condition of the enterprise. In turn, managers of smaller businesses that are based abroad may provide signals to market participants to shed further light on the firm and its performance prospects. A signal is an attribute that a party has private, unverifiable information (Riley, 1989). To be effective, signals must be observable and costly or difficult to imitate (Spence, 1973, 1974). Because of the agency concern that executives of smaller overseas firms may utilize corporate assets for personal benefits at a cost to shareholders, executives of some firms may reliably subject themselves to increased investor guardianship by reducing information asymmetry through a key signal. They could cross-list their firms' common stocks on the U.S. exchanges, thereby lowering information asymmetry and conveying reduced agency conflicts. Cross-listing their shares on the U.S. exchanges helps to reduce the information asymmetry dilemma since these exchanges have higher levels of shareholder protection, more stringent accounting disclosure requirements, and more transparent stock market trading (Doidge, et al., 2004, 2006; Aggarwal, et al., 2009).As noted, firm assets may be used inappropriately. That is, they may be utilized for the private benefits of managers at the expense of firm performance and owners' welfare. However, enterprise assets may alternatively be used productively, promoting firm performance and shareholder wealth. In this study, we are concerned with the liquid asset holdings (cash and short-term investments) of smaller firms that are based overseas and their performance implications. Specifically, we are concerned with liquid asset holdings of those enterprises that have signaled enhanced shareholder guardianship versus those which have not. …