Business Cycle, Cash Holding And Corporate Investment

Business cycle has become a common sense of economists, and there are lots of research on business cycle. As macroeconomic situation is the environment of business operation,it must have important influence on corporate investment behavior. However, exsiting research on corporate investment tend to ignore the impact of business cycle.The relationship between business cycle and corporate investment has not been analyzed and tested systematically.Firstly, we analyze how do business affect the operation of firms. The cyclical fluctuations of the economy play a role mainly in three aspects:fluctuations in the demand in the product market caused by the elasticity of demand, the degree of difficulty of raising funds in capital markets, the level of investment risk caused by economic instability, which change the company’s investment motivation and ability and affect the company’s investment behavior finally. Especially, we emphasize the differences of investment behavior in the different stages of business cycle.This article defines the latest round of business cycle in China, and the three stages of this business cycle. We analyze the characteristics of corporate investment behavior in each stage.Due to the existence of information asymmetries and principal-agent problem in the market, the investment and cash flow shows a strong correlationship, which is called investment-cash folw sensitivity. There are different explainations on the sensitivity,based on information asymmetries theory and principal-agent principle respectively. Scholars use different methods to test the origin of the sensitivity. It has been proved that the impact of cash holding on investment-cash flow sensitivity can be a good interpretation. However, researchs on this issue ignore the the impact of the economic cycle, either. Based on the fluctuations of economic situation, this article analyze how the degree of information asymmetry and agency costs change at different stages of business cycle.On the basis of theoretical analysis, we draw on the investment acceleration model to build the model of this study. We use the data of listed companies in our share market between2000to2010to empirical test these two issues.The main conclusions of this paper are followed. Firstly, the business cycle will significantly impact the company’s capital investment,and the performances of this effect are different in different stages of business cycles. Secondly, the scale of corporate investment increase with the economic recovery, reduce with the economic expansion, and reduce with the economic contraction. Thirdly, in different stages of the business cycle, cash holding has different impacts on investment-cash flow sensitivity. At the stage of recovery and expansion, the company’s stock of cash has significantly improved the correlation between the scale of investment and cash flow, which support the financing constraint hypothesis under asymmetric information theory. In times of economic contraction, the company’s stock of cash has significantly reduced the investment-cash flow sensitivity, which support the free cash flow hypothesis under the agency theory. The most important revelation of this paper is the differences of corporate behavior in different stages of business cycle, which provide a useful reference when explain the differences of the previous studies.