An Empirical Study On The Relationship Between Investor Protection And The Value Of Cash Holding

When the American Subprime Crisis gradually evolved into global economic crisis and had a great negative impact on the global entity economy, this financial storm made more enterprises realize the importance of cash. Now the behaviors of cash holdings become hot issue of theoretical and practical circles again. Cash holdings decision is a piece of important decision on corporate finance. Cash holdings not only reflect the firm's financial strategy and operating strategy, but also are related to the corporate governance and institutional environment. The investor also pay more attention to the question that what is the economic consequence of the cash holdings: value creating or value destroy. LLSV (2000) believed that the management is more prone to be self-interested in the countries which have weaker investor protection. Since the strong investor protection measures can effectively prevent the management's inefficient use and waste of the company's resources, it is necessary from the point of view of investors, to explore how investors view the company's cash holdings behavior, how to assess the company's cash value (that is the market value of cash) and study the extent and mechanism of impact that investor protection has on a company's market value.In this paper, the excess cash is defined as the cash that company hold more than meet the needs of the company after the operation and investment. We study the impact that investor protection has on the company value from the view of the value of excess cash holdings. First, we choose the factors (including the process of marketization, the degree of government intervention in business, as well as legalization level) which can reflect the level of investor protection of this areas as the variables can evaluate the investor protection. Then, we determine the company's excess cash holdings through the cash holding influencing factor regression model. Finally, with the utilization of revised Fama and French(1998) classical enterprise value regression model, we study the extent difference of impact that excess cash holdings has on firm's value between firms with different investor protection. The results show that:under different levels of investor protection, there is a significant difference in the market value of excess cash. A lower level of investor protection in the companies, One yuan value of excess cash is significantly reduced. In contrast, the company with a good investor protection has a higher cash market value. It shows that when the company has a good level of investor protection, whether to have the excess cash may not be important because a good investor protection will play the restraint role to the cash user, and protect the excess cash which would not undermine the value of the company. But in the weak level of investor protection, the holding of excess cash in the company may give a negative economic consequence.Be different with most literature which discuss the relationship between the level of investor protection and the overall value of company, this article uses a combination of normative and empirical methods as well as the comparative study, analyze the effect of investor protection has on the value of excess cash, provides more direct empirical evidence on the relationship between investor protection and the value of the company from a new perspective, clearly shows the mechanism of investor protection effects the value of company. At the same time, considering the environment of China's specific economic system, the findings of investor protection and acts of holding cash provides a new perspective of thinking and recommendations on the decision-making of the cash holdings for investors, management and other stakeholders. It also helps improve the building of investor protection in our country so that the companies will have more reasonable possession and use of cash.