Corporate Diversification And Cash Holdings

Cash holding, an important financial index, reflects the profitability andrisk-resisting ability of companies. It matters decision-making of investment, financingand dividend distribution. Many researches have found that financial characteristics,ownership structure and market environment are the significant influencing factors ofcash holdings. But there is another factor, diversification, which we can’t ignore. As atypical strategy and appreciation model, diversification is prevailing in all over theworld. With the acceleration of world economic integration and deepening of China’sreform and open, corporate diversification has been very common in China’s listedcompanies. In recent years, it has been confirmed that diversified firms hold less cashthan standalone firms. However there are few empirical researches about therelationship between cash holdings and corporate diversification in China. Thereforecompared with foreign condition, would diversified firms hold less cash than standalonefirms in China? What is the mechanism of corporate diversification that impact on cashholdings? Inspired by foreign researches, this paper uses the data of Chinese listedcompanies to study the relationship between corporate diversification and cashholdings.Using the approach of theoretical and empirical analysis, this paper tries to confirmthe impact from diversification on cash holdings in Chinese listed companies. And itstudies on the following aspects:①Measure and analyze present conditions of cashholdings and corporate diversification. Utilize multiple indexes to measure cash holding,observe corporate diversification in two dimensions, and analyze them from overall andindustry-classified perspective.②Based on the static trade-off theory, exposit themechanism of how corporate diversification impact on cash holdings. And then brieflyanalyze the impact from corporate finance and governance factors.③based on theabove analysis, compare the cash holdings in diversified firms to standalone firms.Build empirical model reflects the relationship between cash holdings and corporatediversification, and analyze the empirical results. Finally, perform robustness tests toconfirm the empirical results.We get three key conclusions as followed:①The actual level of cash holding ofChinese listed companies is still quite high. The highest level belongs to InformationTechnology Industry and Communication and Cultural Industry. And the lowest level belongs to Electric Power, Gas and Water Production and Supply Industry. The averageproportion of diversified companies is37.3%. Agriculture, Forestry, Animal HusbandryIndustry has the highest ratio, and Metal, Nonmetallic Industry has the lowest ratio.Besides, the level of diversification in Chinese listed companies is not high either. Thehighest industry is Integrated Industry, and the lowest industry is also Metal,Nonmetallic Industry.②The mean of cash holdings index of diversified companies issignificant lower than standalone companies. The empirical results show that diversifiedfirms significantly hold less cash than standalone firms. A part as50%of the change inthe mean of cash holdings index comes from the focused to diversified firms.Furthermore, the empirical results significantly prove that the higher level ofdiversification the firms have, the lower of cash the firms hold. This evidence isconsistent with foreign researches.③The corporate finance and governance factors doinfluence cash holdings. The corporate finance factors are significant related to cashholdings in general. But the corporate governance factors significance is different inempirical and robustness results. The relationship between corporate governance andcash holding needs to be validated with additional research.