The Impact Of Corporate Diversification On Cash-Holding Behavior And Its Value

Diversification can ease the financing constraints faced by enterprise theoretically through an internal capital market. The financing constraints faced by Chinese corporate and the impacts of diversification should be very different due to the different ultimate controllers. So it’s very significant to analyze the impact of corporate diversification on cash-holding behavior and its and investigate whether the effect differs with the nature of ultimate controller. The effect of diversification on corporate cash-holding behavior is examined from the perspectives of static cash holdings and dynamic adjustment speed. Ultimately the research framework is vertically extended to the analysis on the value of cash holdings. To examine whether the impact of diversification would differ with the nature of ultimate controller, this paper not only distinguishes between state-owned enterprises and private ones, but also divides the former into enterprises owned by central government and local government.The empirical analysis shows that in general, corporate diversification has a negative effect on cash holdings. Moreover, the negative effect in private enterprises is more significant than that in state-owned ones. Because the ultimate controllers of state-owned enterprises include central government and local governments, this paper further categorizes state-owned enterprises into central government-owned ones and local government-owned ones. The result shows that the negative effect is more significant in central government-owned enterprises than that in local government-owned ones. The analysis on the dynamic adjustment of corporate cash holdings suggests that diversification can generally accelerate cash-holding adjustment to optimal level. Comparing state-owned enterprises with private ones, it shows that private enterprises’diversification can speed up the cash holdings adjustment, while the diversification of state-owned enterprises cannot. Further comparing central government-owned enterprises with local government-owned ones, it finds that for both kinds of diversified enterprises, the speed of cash-holding adjustment is lower than that of specialized enterprises. Moreover, central government-owned enterprises generally exhibit faster cash-holding adjustment than local government-owned ones; while in the same business mode, the cash holdings of local government-owned enterprises adjust faster. The examination on the value of cash holdings shows that in general, diversification in both state-owned enterprises and private ones can increase the value of cash holdings, while the increase is less significant in state-owned enterprises than that in private ones. Further comparing central government-owned enterprises and local government-owned ones, it finds that the diversification of central government-owned enterprises can increase the value of cash holdings while it does the opposite in local government-owned enterprises. Therefore, this paper proposes measures such as strengthening the financing support for private enterprises, improving the operation efficiency of state-owned enterprises and reinforcing the regulations for local government-owned enterprises in order to accelerate marketization process, enhance corporate value and serve local economy.Based on the former research, this paper extends the framework of cash-holding analysis vertically. Here we put the problems of cash holdings, the speed of cash-holding adjustment and value of cash holdings into the same framework to establish a relatively complete research chain. This paper attempts to combine the dynamic analysis and static analysis on cash-holding problems. Furthermore this paper proposed that the effect of diversification on corporate cash-holding should also be diversified. So we put the impact of diversification on the corporate cash-holding under the framework of different ultimate controller, and extend the research of cash-holding problem horizontally.