A Tentative Study On The Relationship Between Control Structure And Cash Holding Of Chinese Listed Companies

As capital, cash costs less while with high liquidity, and is often the most favorable choice whenthe entrepreneurs face with investment opportunities; as an asset, cash yields less while prone toagency risk such as over-investment or power abuse, when is holding too much. Therefore,maintaining a reasonable cash holding ratio is not only a significant financial decision, but also animportant and decisive factor of governance efficiency and corporate performance. The optimalcash holding appears when cash retained in the company can not only meet the daily operatingneeds, but also maximize company’s income. In a nutshell, the comprehensive yield is in itsmaximum level. The low level of cash holding, on one hand, will not satisfy the operational orinvestment needs; on the other, will cause a higher transaction and financing cost for theenterprises. On the contrary, the high ratio of cash holding will be accompanied by higher agencycost and power abuse risk. At present, the overall level of cash holdings in China is higher thanthat in the developed countries, for example, in the US and EU. Due to higher agency costs, it isnecessary to study in-depth the factors that affect our cash holdings, in order to explore ways toreduce cash holding’s level and build its best model.Currently, there are four theoretical hypotheses on corporate cash holdings: motivation theory,pecking order theory, transaction trade-off theory and agency theory. The former three areeconomic-oriented perspective, while the last one, the agency theory is based on the operation ofcorporate governance. The influencing factors on cash holdings include financial characteristics,external governance environment and competitive environment, and balancing mechanism ofequity, Board and managers. In terms of corporate governance, financial characteristics, externalgovernance and external competitive environment are the uncontrollable elements, whileelements like balancing mechanism of equity, Board and managers are controllable. Therefore,base on the agency theory, this paper will explore the relationship between the governancestructure and the cash holdings.Through data analysis on A-share listed companies in Shenzhen during2008~2010, theauthor tries to solve three problems: First, the various effects for balancing mechanism of equity,Board and managers on the cash holdings; second, the difference of the control structure’s impact on the cash holdings between different industries; third, the difference of the control structure’simpact on the cash holdings under different levels of cash holding.By the empirical study of the samples, it can be found:(1) positive correlations with cashholdings demonstrate in the top five share proportion, share proportion of the managers and twoduty synthetic of Board Chair and CEO; while negative ones exist in equity feature, proportion ofindependent directors and board size.(2) In the manufacturing sector, there is a positivecorrelation between the proportion of independent directors and the cash holdings, which isinconsistent with the general status; in IT, retail and real estate sectors, the relationship betweencontrol structure and cash holdings is unanimous with the general status; in the other sectors, theshare properties’ impact on cash holding is inconsistent with the general status.(3) when cashholding ratio is more than50%, the proportion of independent directors is the leading factoraffecting cash holding; when cash holding ratio is between24%and50%, the board size is of toppriority; when cash holding ratio is less than24%, the equity feature is the main factor. Finally,the author suggest to clarify the target cash flow and improve the balances mechanism of equityand Board...