Study On The Relationship Between Return Variance Of Stock Market And Financial Decisions Of Listed Firms

During the past years, researchers have provided plenty of studies on enterprises' cash hongldings, capital structure and investments issues, but seldom focus on the relationship between return variance of stock market and these financial decisions. Today Chinese listed firms' security investment behaviors do influence their financial decisions, it is important for us to disccuss on this issue.This paper makes an overall literature review about cash holdings, capital structure and investment issues, introduces the situation about Chinese listed firms' short-term investment behaviors in secondary stock market. Based on the analysis above, this paper tries to establish a framework to reveal the relationship between return variance of stock market and firms'financal decisions and provides hypotheses. Using a sample of almost all A-share listed firms during 2005-2009, this paper tests the relationship between return variance of stock market and firms'cash holdings. The empirical study shows that firms' cash holdings changes are opposite with the return variance of stock market, extremely in a bull market cycle. Further more we find that the cash holdings changes of state-owned firms decrease more than non-state-owned firms'when the return of stock market is high. So do some special industry firms. Our results imply that state-owned firms always decrease more cash holdings to support their security investments.This paper considers the relationship between return variance of stock market and firms' capital structure decisions in order to find whether the listed firms borrow money from banks to make short-term investments in secondary stock market. The empirical study shows that the level of firms' debt ratios is positive correlated with return variance of stock markets, extremely for non-state-owned firms. Further more we find the reason is that state-owned firms are inclined to make stock investments by other financing resources rather than debts from banks because they have light external financing constraints and are easy to bypass the government supervision. Also this paper provides evidences about relationship between the return variance of stock market and firms' investments decision. The results show that the amount of firms'investments is positive correlated with the return variance of stock markets. Further test has been made on the investment cash flow sensitivity. And we found that the investment cash flow sensitivity decreases when the return of stock market is high. The result implies that the firms have light external financing constraints when the return of stock market is high. This means that Chinese stock market can provide correct predicton for ecnomic development.Our conclusions imply that Chinese listed firms' financal decisions are closely related with the return variance of stock market, and the relationships may be different for different ownership types firms.