Research On The Formation Mechanism And Economic Consequences Of The Anomaly Of "High Deposits,High Loans" In Enterprises

In a perfect,frictionless capital market,a firm's cash holding decisions would appear to be irrelevant.However,in the real economy,capital markets are not perfect due to information asymmetries,transaction costs,and taxes.As a result,holding cash becomes a rational choice for companies to hedge against future uncertainties.In order to cope with various possible shocks,enterprises are more inclined to hold high amounts of cash,especially in the current macro context where China's institutional construction and financial market development are not perfect.In addition,since the 2008 global financial crisis,the domestic and international economic situation has become more complicated,with economic policy uncertainties rising year by year,and quite a few companies going bankrupt due to a break in the financial chain,which has further reinforced the "cash is king" concept in the minds of people.In theory,cash is a safe and highly liquid asset,which can help enterprises to ease financing constraints,reduce liquidity risks and additional financing costs associated with external shocks,and thus reduce the risk of corporate default.However,the event of "listed company Kangde Xin holding high cash but defaulting on bonds" in early 2019 directly challenged this economic intuition.Moreover,there are not a few "high deposits,high loans" enterprises like Kangde Xin,which have both high cash and high short-term interest-bearing liabilities.These companies prefer to hold a large amount of cash rather than pay off their short-term debts with high interest costs,which contradicts the classical pecking order theory and can only be described as a financial anomaly that makes us doubt the authenticity of the high cash on the books of the "high deposits,high loans" companies.However,existing research on corporate cash holding behavior almost implicitly assumes that the monetary fund balances disclosed in corporate financial statements are real,and neglects to explore their authenticity.In recent years,due to the huge pressure of financial deleveraging,coupled with the surge of economic policy uncertainty and the continuous tightening of bank credit policies,corporate financing pressures have risen sharply.At the same time,companies have a stronger incentive to signal their financial health to the outside world,leading to frequent manipulation of corporate cash balances.When a firm's book cash balance may be manipulated,the findings of previous research on corporate cash holdings may be different.In view of this,this paper takes the companies with " high deposits,high loans" phenomenon in China as the research object,theoretically analyzes and empirically tests the causes and implementation methods of the anomaly,and reveals the economic essence of the high cash holdings of the " high deposits,high loans" enterprises.Furthermore,it studies the economic consequences of the "high deposits,high loans" anomaly from the stock market and the bond market,and adds new evidence to the literature on the motivation and consequences of high cash holdings from the perspective of the authenticity of monetary fund balances.Specifically,the research content and conclusions of this paper are mainly reflected in the following three aspects.First,the formation reasons and implementation means of the anomaly of "high deposits,high loans".First of all,in terms of the causes,by integrating the realistic background of China's macroeconomic environment changes,banking industry competition and legal system construction into the specific interest subjects such as major shareholders of companies and commercial banks and the regulatory environment they are in,and by combining relevant mature theories and the case of Kangde Xin to carry out an in-depth analysis,this paper believes that there are three main reasons for the formation of the anomaly of "high deposits,high loans" of enterprises: first,the major shareholders are faced with strong financing constraints,and have tunneling motivation at the same time,which makes major shareholders may meet their own capital needs by occupying funds of listed companies;second,the fierce competitive environment in the banking industry makes some banks choose to take the risk to cooperate with listed companies and their major shareholders in cash management;thirdly,the construction of the legal system lags behind the development needs of the capital market,resulting in extremely low costs for banks and listed companies to violate the law.Accordingly,the empirical tests in this paper find that when major shareholders face stronger financing constraints,have a stronger motive to tunnel the company,or when competition in the banking industry is more intense,or when the degree of standardization of banking business is lower,or when the regional legal environment is worse,enterprises are more likely to show the "high deposits and high loans" anomaly.It is confirmed that the controlling shareholders occupying the funds of listed companies due to financing constraints,the fierce banking competition environment,and the low cost of violations of laws and regulations are the main reasons for the anomaly of "high deposits,high loans".Secondly,about the implementation means,in this paper,it is argued that there are two specific realization channels for the "high deposits,high loans" anomaly:(1)temporary lending of funds at the end of the period,and(2)asset pledge loans.Accordingly,the empirical tests in this paper found that the "high deposits,high loans" enterprises have lower rates of return on funds,higher costs of funds,and more restricted funds,confirming that enterprises do realize the "high deposits,high loans" by temporarily borrowing short-term and high-interest "bridge" funds at the end of the period or pledging cash assets to obtain new loans.Finally,the paper also rules out the possibility that cash is used for operating activities and dividends,and the alternative explanation that the anomaly is caused by the inefficient use of funds by a conglomerate.In conclusion,the formation mechanism test confirms that the economic essence of the anomaly of "high deposits,high loans" is a self-interested behavior that major shareholders facing severe financing constraints encroach on the funds of listed companies with the cooperation of banks,and also use cash management methods to inflate the monetary fund balance at the end of the period to conceal their illegal fund appropriation.Second,"high deposits,high loans" and corporate stock price crash risk.Based on the findings of the previous study,this paper concludes that the funds of the "high deposits,high loans" company were illegally occupied by major shareholders,and the company also used cash management methods to inflate the cash stock at the end of the period,creating a "cash illusion".This makes it difficult for capital market investors in the short-term to recognize the capital occupation behavior of major shareholders in a timely manner and reflect the stock price in real time,resulting in the accumulation of bad news.When the accumulation of bad news exceeds a threshold,it is released in a concentrated manner,causing share prices to plummet and collapse.In other words,the risk of stock price collapse should be higher for companies with " high deposits,high loans ".Accordingly,the empirical findings:(1)The risk of stock price collapse is significantly positively correlated with "high deposits,high loans",and this phenomenon holds after a series of robustness tests.(2)The effect of "high deposits,high loans" on stock price crash risk is significantly stronger when the company has been in a state of "high deposits,high loans" for many consecutive years or quarters,or when they adopt a gradually stricter definition of "high deposits,high loans" enterprise.(3)The mechanism test finds that(i)"High deposits,High loans" firms have more capital-related transactions,more capital-related guarantees,indicating that "high deposits,high loans" firms do have large shareholders' capital appropriation,which increases the negative news within the firm;(ii)The correlation between corporate cash fluctuations and income fluctuations in "high deposits,high loans" firms is weaker,and the balance of fundrelated transactions is not greater.This shows that the high monetary balance of the "high deposits,high loans" firms at the end of the period is indeed the result of artificial cash management,and its purpose is to hide the bad news that the major shareholders illegally occupy funds.(iii)"high deposits,high loans" firms also deliberately lowered the quality of information disclosure and increased the information asymmetry between the company and the outside world.The specific manifestation is that "high deposits,high loans" firms have a higher level of earnings management,worse internal control quality,and are less willing to hire the four major international companies,but paid higher audit fees.The results confirmed that the increase in the risk of stock price collapse of "high deposits,high loans" firms is indeed due to the company's cash management behavior and the low quality of information disclosure hide and the accumulated bad news about major shareholders' appropriation.Third,"high deposits,high loans" and the cost of corporate bond financing.This paper argues that the "high deposits,high loans" enterprise by inflating the cash balance at the end of the period and sending a signal to the outside world that the company's credit status is good,does not really reduce the default risk of the company,but rather the major shareholders' occupation of the company's funds seriously harmed the interests of creditors.It also greatly reduces the solvency of the company,making the company's capital chain may break at any time when facing sudden liquidity crisis.This greatly increases the risk of default,resulting in lower credit ratings from credit rating agencies and higher risk compensation from bond market investors.Accordingly,the empirical findings show that(1)When the level of short-term debt is low,increasing cash holdings can reduce the cost of bond financing,which is reflected in the improvement of bond credit ratings and the decrease of bond credit spreads;when the level of short-term debt is high,increasing cash holdings can no longer reduce the cost of corporate bond financing.The preliminary results indicate that the bond pricing effect of cash holdings may be reversed as the level of short-term liabilities increases.(2)Bonds of "high deposits,high loans" firms have lower credit ratings and higher credit spreads,and this finding holds after a series of robustness tests.(3)When a company has high deposits and loans for many consecutive years or seasons,or adopts a gradually strict company definition of "high deposits,high loans",the effect of "high deposits,high loans" in raising corporate bond financing costs is significantly stronger.(4)The mechanism test finds:(i)The cash volatility of "high deposits,high loans" companies is lower,and the correlation between cash fluctuations and income fluctuations is also weaker,indicating that the "high deposits" of "high deposits,high loans" companies are the result of artificial cash management;(ii)The daily cash of "high deposits,high loans" companies is more derived from financing activities rather than operating activities,and it is more likely to borrow new and repay the old,indicating that continuous debt financing has formed the "high loans" of "high deposits,high loans" companies and is a major fund source of shareholders' appropriation.The results confirm that the increase in bond financing costs of "high deposits,high loans" companies is indeed due to the company's cash management behavior and continuous debt financing activities that increase the company's default risk and reduce its solvency.The possible research contributions of this paper are:(1)Existing literature on the motives and consequences of corporate cash holdings almost implicitly assumes that corporate cash holdings are real,while this study finds that firms may also opportunistically manipulate their book cash balances for certain purposes,which makes it necessary to reexamine the findings of the current literature on corporate cash holdings.(2)The existing literature on corporate cash manipulation focuses on the manipulation of cash flows from operating activities.Manipulation is done by manipulating the timing of cash settlements by deferring accounts payable,accelerating collection or sale of receivables,or by reclassifying items on the statement of cash flows by including cash flows from investing or financing activities in operating activities.However,this paper focuses on the manipulation of corporate cash balances,which is more aggressive,more subtle,and more difficult to judge in advance.This study helps to enrich the literature on corporate cash manipulation and the ways and consequences of large shareholders' capital appropriation.(3)Existing studies generally believe that cash can help companies ease their financing constraints,thereby reducing the risk of default.However,this study finds that when the company presents the anomaly of "high deposits,high loans" that simultaneously holds high cash and high shortterm liabilities,cash holdings not only do not reduce the firm's risk,but also increase the firm's business risk and default risk due to major shareholders' capital appropriation.The results show that for the "high deposits,high loans" enterprises,high cash holdings are only fig leaf for the major shareholders' capital appropriation behavior,not a reflection of high transparency of financial reporting information or high solvency of the company.