Grabbing hand or financial constraint mitigation effect? A reexamination of the relationship between institutional development and cash holdings.

This study reexamines the impact of institutional development on corporate cash holdings. Our findings confirm that institutional development has a negative effect on corporate cash holdings, which may be partially explained by the financial constraint mitigation effect of institutional development. Our empirical evidence also shows that the corruption index, used as a proxy for the grabbing hand effect, does not mediate the negative effect of institutional development on corporate cash holdings. Furthermore, the impact of institutional development on corporate cash holdings is not significant for large firms and state‐owned enterprises. These results are robust to different measures of cash holdings. [ABSTRACT FROM AUTHOR]