Agency problems are an importaiit detertninant of ccrpatate cash holdings. For a sample of more than 11,000 firms fiibm 45 countries, we find that ccrporatioiis in countries where shaidiolders rights are not well protected hold up to twice as much cash as corpontioiis in cotmtries with good shareholder protecticHi. ii addidoo, when shareholder protecti(Hi is poor, factns that genenlly drive Ihe need for cash holdings, stich as investment opportunities and asymmetric infcnnadco, actually became less inqxntaiiL These results are stronger after controlling for cqntal maiket development. Indeed, consistent with tbe impntance of agency costs, we find that finns hold lai^er cash balances when access to funds is easier. Otir evidence is consistent with the conjecture that investors in countries with poor shareholder protecdon cannot force tnanagers to disgorge excessive cash balances. I. Introduction At the end of 1998, the largest corporadons around the wrald (as listed on the Global Vantage database) held $1.5 trillion of cash and cash equivalents, which is almost 9% of the book value of their assets and slighdy above 9% of the market value of their equity. These numbers indicate that investments in cash are important for corporadons. Undl recendy, however, scholars paid reladvely litde direct attendon to die causes and consequences of corporate cash holdings. Instead, transacdons costs were assumed to be the major determinant of cash levels and firms with a higher marginal cost of cash shortfalls were expected to hold more cash (see, for exanq)le. Miller and Orr (1966), Meltzer (1993), and Mulligan (1997)). With few excepdons, discussions of other factors that could affect cash holdings were not the central theme of research.

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