An Empirical Research On The Value Of Cash Holdings For Listed Companies In China

In a frictionless environment, companies can fund all value-increasing investmentopportunities. That is, investment and growth do not depend on the availability ofinternal capital. Once capital market imperfections are introduced, however, frms arenot necessarily able to pursue all value-increasing investment opportunities. Thus,capital market frictions increase the cost of outside capital relative to internallygenerated funds. Consequently, some frms that have attractive growth opportunitiesinvest less than the frst-best optimum, leading to lower future growth and reducedoperating performance and frm value. One way to mitigate these adverse effects is forfrms with high costs of external fnance to rely more on internal fnancial resources:cash fow and cash holdings.Based on the existing literature related with company cash holding policy, andfrom the view of external financing condition of Chines listed companies, this paperconducts focusedly on the relationship between the external financing constraints andcorporate cash holdings policies; and by referring to the method of marginal value ofregression, carries out empirical test on the differences in and sources of, financial andnon-financial constraints in company’s cash value held, on the data obtained fromnon-financial listed companies’ financial and market between2006and2010; finally,concludes with some appropriate policy recommendations.Our study contributes to other strands of the literature. First, it complements theevidence on the value of cash for constrained frms, and the sources of value increase.We demonstrate that cash is associated with greater investment for constrained frmsand that the marginal investment of constrained frms is associated with greater valueincrease than that of unconstrained frms. Second, we contribute to the debate in thecash holdings literature on whether high cash holdings are value increasing. Our resultssuggest that, for fnancially constrained frms, high cash holdings are avalue-increasing response to fnancing frictions.