An Empirical Research On Debt Constraint And The Value Of Cash

The cash holding is a major financial decision for a company, which reflects the company's financial strategy and business strategy and is closely related to the corporate governance of the company. Global Vantage database shows that the world's largest companies hold more than 115 trillion US dollars in cash and securities in late 1998, which occupies 9 percent of the book value of these companies. Brealey and Myers argue that how to determine a company's cash holdings is one of the 10 issues yet to be solved in the aspect of financial management.Although there have been extensive researches on cash holdings, few scholars have carried out research on the issue. According to the research of foreign scholars, this paper estimate what value does the shareholders place on the cash that the firm holds. This paper collects the cash holdings, leverage and financial indicators of listed companies in Shanghai Stock Exchange in the 2001-2005 periods and then examines the relationship between the value of cash, cash holdings and debt constraint. The result demonstrates that the average value of cash for listed companies is equal to 0.82, which is significantly less than 1. The devaluation of cash is due to the inefficient use of cash. In terms of the relation between the value of cash and cash holdings, as the cash levels increases, the value of cash decreases which shows that companies with sufficient cash are more likely to have excessive investment. Moreover, we found that the debt constraint has negative impact on the value of cash. The result reveals that the state-owned commercial banks don't play an important role in the governance of the listed companies.