The Deviation From Expected Cash Holdings And The Corporate Future Performance

This paper uses Shanghai and Shenzhen listed companies as the research object, and extracts the data including 6856 effective samples of a total of eight years from 2001 to 2008. By using these financial indicators, this paper tests the impact of these factors on the expected cash holdings of these companies. And a further study is conducted about the impact of the deviation from the expected cash holdings on the company's future performance(measured by Return On Assets,ROA). This study extends the Opler et al. (1999) research model, and establishes a more comprehensive method to model the expected cash holdings of listed companies. Also this paper provides a strong empirical evidence to support the static trade-off theory on the point of expected cash holdings. The results of the empirical test with a large sample demonstrate that, when a company has generated extraordinary deviation from the expected cash holdings, it will make complex effects on its future ROA. The main conclusions of this paper are: (1)When companies hold more cash holdings than the expected cash holdings, the firms with High ROA in this year can increase their next year ROA by holding excess cash holdings, while those with Low ROA will reduce their next year ROA by holding excess cash holdings; when companies hold less cash holdings than the expected cash holdings, the firms with High ROA in this year can increase their next year ROA by holding deficient cash holdings, while those with Low ROA will reduce their next year ROA by holding deficient cash holdings. (2)The impact of holding less than expected cash holdings on the company's future ROA is larger than that of holding more than expected cash holdings. For companies with High ROA, the impact of increasing their next year ROA by holding less than expected cash holdings is bigger than that by holding more than expected cash holdings; and for companies with Low ROA, the impact of reducing their next year ROA by holding less than expected cash holdings is bigger than that by holding more than expected cash holdings.