Studies On Cash Holding Policy Of Listed Companies In China

In a world of perfect and complete capital markets, as has been demonstrated by Modigliani and Miller (1958), there are no financing frictions; external finance is perfect substitute for internal finance, so a firm's cash holding policy is irrelevant for firm's value. However, there is a large divergence between the capital market in reality and assumed perfect capital market. By relaxing perfect capital market's assumptions, financial economists examined the determinants and value effects of corporate cash holding policy from different aspects, and advanced and developed the theories of cash holding policy such as traditional trade-off theory, agency costs theory and financing constraints theory, and provided us with abundant academic research literature.This dissertation mainly examines the relationship between external financing constrains and corporate cash holding policy form the aspect of external financing condition that Chinese listed companies are facing. It is divided into eight chapters.Chapter 1 briefly introduces the issues, contents, and framework, as well as the contributions of the dissertation to research in this area.Chapter 2 systematically and roundly reviews existing academic literature about corporate cash holding policy, inducing and synthesizing a new theory of corporate cash holding policy—financing constraints theory, and suggests that external financing constraint is one of the most important determinants of corporate cash holding policy.Chapter 3 briefly explores the macro background of Chinese listed companies' financing condition, analyzes the development process and problems of capital market in China.Chapter 4 constructs two synthetic indexes reflecting the degree of financing constraint—LFC index and DFC index via Logistic regression model and multiple discriminant analysis, using financial data from Chinese listed companies during 1999-2005 periods, and then briefly evaluates the two financing constraint indexes via " investment-cash flow sensitivity".Chapter 5 examines the relationship between financing constraints and corporate cash holding policy from two aspects such as the level and change of corporate cash holdings via LFC index and DFC index, using financial data from Chinese listed companies during 2000-2006 periods.Chapter 6 investigates the relationship between financing constraints and the value of corporate cash holding from two aspects such as the market value and marginal value of corporate cash holdings via LFC index and DFC index, using financial and market data from Chinese listed companies during 2000-2006 periods.Chapter 7 tests the mitigating effects of financial development and marketization course on financing constraints from two aspects such as "investment-cash flow sensitivity" and "cash-cash flow sensitivity", using financial data of Chinese listed companies and market data of financial development and marketization index from each region in China during 2000-2005 periods.Chapter 8 concludes the research and point out the limitations and future areas of the research.The conclusions of this research are as follows:Firstly, this dissertation constructs two synthetic indexes of financing constraints—LFC and DFC index. The two indexes have high discriminating power and are high correlated with the correlation coefficient of 0.709 and significant level of 1%.Secondly, liquidity constraints investment model has higher power than Q investment model in explaining the behavior of investment of Chinese listed companies; and more importantly, the investment-cash flow sensitivity of highly financially constrained companies is significantly higher than that of lowly financially constrained companies under the criteria of LFC and DFC index.Thirdly, there exists a significantly negative relationship between the degree of financing constraints and the level of cash holdings; however, there is a significantly positive relationship between the degree of financing constraints and cash-cash flow sensitivity, this suggests that highly financially constrained companies have higher propensity to save cash out of cash flow than lowly financially constrained companies.Lastly, the market value and marginal value of cash holdings for highly financially constrained companies are both higher than lowly financially constrained companies; and the further result show the higher values of cash holdings for highly financially constrained companies are mainly derived from the mitigating effects of cash holdings on underinvestment problem.The main contributions and innovations of this dissertation are in the following aspects:Firstly, based on the existing literature about corporate cash holding policy, this dissertation induces and synthesizes a new theory of corporate cash holding policy—financing constraints theory, and then empirically examined corporate cash holding policy and its value effects under the condition of financing constraint.Secondly, this dissertation constructs two synthetic indexes reflecting the degree of external financing constraints—LFC index and DFC index.Lastly, this dissertation systematically investigates the relationship between external financing constraints and the value of corporate cash holdings using data from capital market in developing country.The main limitations of this dissertation are as follows:Himmelberg, Love and Allende (2003) argued that financing constraints and agency costs are another two chief explanations for corporate cash holding policy besides transaction costs. But meanwhile, they also suggests that the distinction between agency costs and financing constraints is meaningless, because financing friction is solely the consequence of the agency conflict between owners and managers. However, this dissertation overlooks the impacts of corporate governance on cash holding policy during the whole research process, and this may lead to some bias and limitations of research results. Meanwhile, this dissertation mainly uses cross-sectional static regression analysis and is short of dynamic analysis on the effects of financing constraints on cash holding policy, and this also may lead to some unsteadiness of the results.