Cash Holdings Of Listed Companies In China Factor And The Market Value

Cash holding decision is a piece of important decision on corporate finance. Brealey and Myers (1996) stated that how to determine the optimal firm cash holdings is one of the ten puzzles undetermined in the financial research field. Firm cash holdings not only reflect the firm's financial strategy and operating strategy, but also are related to the corporate governance and institutional environment. And the investors pay more attention to the question that what is the economic consequence of the cash holdings: value creating or value destroying.The organization of this paper is as follows: chapter 1 gives an introduction and clarifies the research motivation. In chapter 2,I review the theory and prior literature related to cash holdings. Chapter 3 analyzes China's institutional background and present situation of cash holdings. After that, from Chapter 4 to Chapter 7,I do four empirical researches in cash holdings to find the factors affect the level of cash holdings and the market value of the cash holdings in Chinese listed firms. These four empirical topics are from two perspectives: the financial characteristics and corporate governance. The emphasis of the paper is two questions: whether the corporate governance will influence the level of excess cash holdings and affect the market value of excess cash. Chapter 8 concludes and discusses the implication of this research.The conclusion and contribution of this paper are as follows:1. Most of the researches in foreign countries found that cash holdings were negatively related to the firm size and the prior researches in Chinese firms found a positive or ambiguous relationship between them. This paper, at the first time, finds an inverse U relationship between the level of cash holdings and firm size in Chinese listed firms.2. Due to the great differences of economic environment and institutional background, this paper find corporate governance is positively associated with excess cash in China. Under the good corporate governance, shareholders can monitor the managers' behaviors effectively and thus allow the managers to stockpile more cash to take advantage of the investment opportunities. But on the contrary, if the firm has bad corporate governance, the managers will spend excess cash when generated. This paper provides new evidence on the relationship between the corporate governance and excessive cash. Spending hypothesis is more suitable to explain the cash holding decisions of Chinese companies than flexibility hypothesis3. This paper is the first one to investigate the relationship between the corporate governance and market value of the cash holdings in China. The result shows that corporate governance has a substantial impact on the firm's value and operating performance through its impact on cash. The well-governed firms have a higher market value of excess cash. Furthermore, poor-governed firms' excess cash has a negative impact on future operating performance. This negative impact of large cash holdings on future operating performance is cancelled out if the firm is well-governed. This paper finds that firms with poor corporate governance wastes excess cash resources and thus destroy firm value. The evidence tells us that a well governed firm has its excess resources better "fenced in," and it may matter very little whether a firm holds excess cash—if it is well governed.So from the perspective of shareholders, especially the minority shareholders, the important thing is not the levels of cash holdings, but the effective mechanism to monitor the managers, sometimes the controlling shareholder, how to use the cash. The implication to investors is, when they attempt to judge a firm's cash holdings, they should pay more attention to the combination of the developing stage of the firm, the investment opportunity, the degree of the financial leverage and the other financial characteristics. In additional, they should focus on the incentive of the managers to hold the cash, which is to maximize the firm value or just to chase private interest of them.This paper provides a fresh insight into the role of the corporate governance in Chinese listed companies by providing a direct link between governance and the value of an important asset of the firm: cash holdings.