An Empirical Study On The Relationship Between Unusual Large Cash Holdings And Corporate Performance

Whether conservative financial policies could affect corporate performance is themain concern in this article. In order to identify the relationship between cash reservesand corporate performance, I analysis the characteristics of firms with different cashholding structures in different periods, taking 2004-2006 as the first period and2007-2009 as the second period. Firstly, sample selection procedure meant to pick outfour samples ,each of which had unique cash holding feature during the first researchperiod. Secondly, by means of linear regression, cash holdings were estimated throughrelative factors, and unusual cash holdings were also calculated based on the regressionmodel in this stage. In the next period, corporate performance estimation was completedby a linear regression with five other independent variables besides unusual cashholdings. At last, Logistic regression and Pearson correlation analysis were also used assupplementary methods to help find out what drives large cash holding behavior, andwhat the consequences are.In this article, unusual cash holdings are defined and calculated in the first stage.And using unusual cash holdings to proceed the second stage of analysis , the datacomparability and information content are more satisfying than using extra cashholdings, besides, the sample grouping method in this research are precise andtarget-oriented. This research explore several cash holding related aspects rather thansimply focus on what happens to corporate performance if firms reserve more cash. Andthe result is much clear: persistent large cash reserves do not harm performance, whichproves tradeoff theory; fluctuant large cash reserves has negative influence onperformance, which support proxy theory. The improvement in corporate performancecomes in two ways:corporate firms with conservative financial policies should increaseinvestment expenses to reduce opportunity cost of large cash holdings; risk-preferredfirms should strengthen the board supervision function to decrease agency cost.