Research On The Economic Consequence Of Excess Cash Holding In Enterprises

Since the 2008 financial crisis, a great amount of enterprises in the world facing bankruptcy and liquidation because of capital chain rupture. "Cash is king" became the survival principle of under- and post- financial crisis. Along with global enterprises inclining to enhance the cash holdings, the research on the effects of enterprises’ cash holding is getting more and more significant and practical meanings today. The reason is that financial crisis not only has negative impacts to enterprises, but also brings chances to investment outside and occupies the markets for those firms which holding enough cashes. For example, Chinese enterprises holding enough cash not only carry on a wave of mergers and acquisitions oversea, but also carry more and more vigorous M&A activities in domestic M&A markets since the outbreak of the financial crisis. M&A is one of enterprises’ important investment behaviors, needing support of powerful cash capability. Then, whether enterprises holding excess cash are more inclining to launch mergers and acquisitions? Whether launching M&A for enterprises with excess cash holdings can create values? The motivations of enterprises’ launching M&A are different, and the economic consequence would have great difference. Based on this, the economic consequence of enterprises’ holding excess cash is researched through inspect on the reasons of launching M&A by enterprises with excess cash holding in this paper.Based on the M&A samples of Chinese companies listed in Shanghai and Shenzhen from 2008 to 2011, this paper integrated the normative and empirical method in this research based on the theories of cash holding and M&A relevant, utilizing special investment events of enterprises’ M&A activities, examined if there is any target cash holding level of listed companies in China, conduct as theoretical foundation and practice methods of division between excess cash holding firms and inadequate cash holding firms. This paper analyzes the reasons of excess cash holding firms’ launching M&A through empirical study in three ways, such as M&A decisions, M&A performance and managers’ private interests of acquiring firms. This paper goes on study the economic consequence of firms’ excess cash holdings. In order to enhance the robustness of these three levels, this paper further studies the dynamic adjustment speed of cash holdings in acquiring firms. Specific empirical results summarized as follows:(1) This paper uses the mean regression model of cash holdings (Opler et al.,1999) to analyze the cash holdings dynamic adjustment behavior of acquiring firms, the research results indicate that the acquiring firms’ cash holdings have the characteristics of "mean-reversion", i.e. that the acquiring firms’cash holdings will be controlled in the range of a relatively stable, which is the preliminary analysis of the existence of the target cash holdings. Under the hypothesis of mean reversion of cash holdings is verified, this paper uses dynamic panel data model to estimate the adjustment speed of the acquiring firms’ cash holdings in further; the empirical results show that M&A-as an important investment behavior, is one of the important ways of firms adjusting the level of cash holdings. When the actual cash holdings deviated from the target cash holdings, firms will take advantage of M&A in order to actively adjust the firms’ cash holdings to narrow the gap with the target cash holdings.(2) Applying Logit model and pooled OLS model, this paper studies the influence of acquiring firm’s cash holding position on the M&A decision, short-term M&A performance and long-term M&A performance, which provides the first layer empirical evidence and the second layer empirical evidence to research the economic consequence of excess cash holding based on the M&A decision and the M&A performance to test mergers and acquisitions motivation of excess cash holding firms. The test results indicate that excess cash holdings firms have more inclinations to acquire than those inadequate cash holdings firms. And the further study finds that excess cash holdings firms whose proportion of executive holding is less than or equal to 25% have more inclinations to acquire, which indicates that agency problems are more likely to exist in excess cash holding firms. Because of investors cognitive limitations and limited attention, market could not make timely and effective reflection for the effects of the acquiring firms’ on M&A performance in the short term, so the acquiring firms’ cash holding has no significant influence on the short-term M&A performance. The cash holding in those excess cash holding acquiring firms has negative influence on the long-term M&A performance. But the cash holding in those acquiring firms with inadequate cash holdings do not have significant influence on the long-term M&A performance. The empirical outcomes uphold the agency motives of excess cash holding firms, which indicates that excess cash holding acquiring firms are more likely to engage in value-decreasing mergers and acquisitions. So the firm holding excess cash has a negative value effect.(3) Applying a multiple regression model, this paper studies the influence of the M&A decision on executive personal benefits on the different cash holdings, which provides the third empirical evidence to study the economic consequence of excess cash holding based on the executive personal benefits to test mergers and acquisitions motivation of excess cash holding firms. The test results indicate that the M&A decision of excess cash holding firms have significant positive influence on executives’monetary compensation and non-pecuniary compensation. In other words, after one year of successful M&A in excess cash holding firms, the executives’monetary compensation and non-pecuniary compensation have been significantly increased. The conclusion suggests that in order to achieve the. maximization of personal benefits after M&A, the executive of excess cash holding firms have strong motivation to make value-decreasing investment decisions. But the M&A decision in those acquiring firms with inadequate cash holdings do not have significant influence on executives’ monetary compensation and non-pecuniary compensation. The empirical outcomes uphold the agency motives of excess cash holding firms. Excess cash holdings provide the opportunities for executives to seek personal benefits, which induce that executives make value-decreasing investment decision. So the firm holding excess cash has a negative value effect.(4) Applying the dynamic adjustment model of cash holdings, this paper studies the difference of the adjustment speed of cash holdings between excess cash holding firms and inadequate cash holding firms, which provides empirical evidence of robustness test to research the economic consequence of excess cash holding based on the adjustment speed of cash holdings to test mergers and acquisitions motivation of excess cash holding firms. The test results indicate that the adjustment speed of cash holdings in excess cash holding firms is faster than the adjustment speed of cash holdings in inadequate cash holding firms. The result can be analyzed from two aspects:firstly, when firms hold excess cash, in order to get personal benefits, executives will make use of M&A to control excess cash holdings and adjust the level of cash holding. Secondly, in order to avoid the battle for control and protect the safety of their own position, executives tend to waste excess cash holdings as soon as possible. The empirical outcomes uphold the agency motives of excess cash holding firms, which indicates that executives of excess cash holding firms are more likely to make value-decreasing investment decision. So the firm holding excess cash has a negative value effect.Expected possible innovations in this paper are mainly reflected in the following three aspects:(1) As an important investment behavior, M&A is an important way to adjust the level of cash holdings. In this paper, by studying cash holdings’characteristics of "mean reversion", the dynamic adjustment of cash holdings and the change trend of acquiring firms’cash holdings before and after M&A, it is estimated that acquiring firms’ adjustment speed of cash holdings in order to test whether firms have target cash holdings. This paper provides new research perspectives and ideas for cash holding theory, so as to broad the field of cash holding theory research.(2) This paper not only studied the M&A behaviors of excess cash holding firms, but also used inadequate cash holding firms as paired samples. Through empirical testing the differences of M&A behaviors between the two types of firms, this paper makes the research conclusion more persuasive.(3) Utilizing special investment events of firms’mergers and acquisitions and adopting event study, this paper did multi-perspective research on the economic consequence of excess cash holding based on mergers and acquisitions motivation, which made this paper more rigorous. This paper analyzes the reasons of excess cash holding firms’launching M&A through empirical study in three ways, such as M&A decisions, M&A performance and managers’private interests of acquiring firms. This paper goes on study the economic consequence of firms’excess cash holdings. In order to enhance the robustness of these three levels, this paper further studies the dynamic adjustment speed of cash holdings in acquiring firms. The contents of the above four aspects are complementary, which makes this paper more comprehensive and rigorous in the study of mergers and acquisitions motivation and the economic consequence of excess cash holding. Scholars studied the economic consequence of excess cash holding with single angle, such as the influence on firms’performance in general, however, this paper breaks some defects of them.