The Study Of The Relationship Among Abnormal Cash Holdings, Product Market Competition And Financial Constraints

Companies need to hold the appropriate number of cash for surviving. Companieswith perfect financial and operational strategy arel not allowed to keep high-level cash, forcash itself not only can’t create value but also increases cost; But, if there is a little cashleft in hand, it will result in lacking of cash and couldn’t meet a normal business activity,which will also damage companies’ interests, or even stop they healthy development. Theamount of cash has something with the business situation and the external competitiveenvironment. Neither too much nor too less is good for the companies, both are equallyreflect the companies’ management efficiency on competition and the degree in corporategovernance。The word competition roots in economics. Product market competition is thought tobe increasing the companies’ efficiency, and adding the shareholders’ value. Productmarket competition plays an important part in easing the conflict between shareholders andoperators. The more competition, the better corporate governance became effective, and itcan also promote the company or even the entire market’s development. Under thecompetition, companies need to measure the quantity of cash and make sure it close to thebest holdings.Besides, we have to consider the financial constraints, another factor in the capitalmarket. Compared to the private enterprise, the financial constraints in the state-ownedones are lower; Compared to companies with smaller time interest earned ratio, those withbigger ones bear higher constraints. During companies’ running process, we shouldconsider both the above quota cash holdings and the shortage ones, and, we also mustnotice companies face financial constraints more or less, which effect on the cash holdings.This paper uses4569dates from1550listing and non-finance companies in Chinastock market, related to years from2007to2009. The abnormal cash holdings is set to bedependent variable, the product market competition and financial constraints is set to beindependent variables, by using SAS regression method, we study the relations amongabnormal cash holdings, product market competition, and financial constraints.The results show that:(1) the fierce of product market competition, the normal thecash holdings, that is, the lower the abnormal cash holdings.(2)Compared to thestate-owned enterprise, in the private enterprise, negative correlation between product market competition and abnormal cash holdings is much weaker.(3) Compared to thecompanies with bigger time interest earned ratio, in those with smaller ones, negativecorrelation between product market competition and abnormal cash holdings is muchweaker.