Internal Controls Can Inhibit Excess Cash Holdings It

Excess cash holdings represent the difference or the degree of deviation between actualcash holdings and the normal cash holding level.If the actual cash holding is higher thannormal level we called cash redundancy, or cash shortage. This paper aims to study therelationship between the internal control and the excess cash holdings, if effective internalcontrol can effectively inhibit the cash redundancy and cash shortage is the focus of thispaper.Financial management behavior of modern enterprise is an important issue of cashholdings. It is not good for a company to hold too much or too little cash, because that allreflect the imperfection of company’s management efficiency and corporate governancemechanisms. There is little literature on excess cash holdings in our country, such as YuXin, Liping Xu (2006b), Xingquan Yang, Zhaonan Zhang (2010), which research theexcess cash holdings from the point of corporate governance. And now there is noagreement about cash holding is based on the trade-off theory or agency theory. If asignificantly relationship exist between internal control and excess cash holdings, that willbe a new evidence for agency theory and effectiveness of internal control.Based on reviewing the literature at home and abroad, our paper discusses therelationship between internal control and the excess cash holdings, and then put forwardhypotheses. Our paper using the2007-2010data of China’s listing Corporation as theresearch object. Firstly referencing the model which constructing the factors of the cashholdings to calculate the excess cash holdings as Dittmer et al.(2003) do. Secondly, usingthe excess cash holdings as the dependent variables and internal control as the explanatoryvariable to analysis the relationship between internal control and excess cash holdings. Theresults show that: the internal control is able to reduce the excess cash holdings, but mainlyin inhibition of cash shortage.