The Replacement Of Local Officials And Corporate Cash Holdings

Government officials are on behalf of power and because of heterogeneity, the replacement of officials become an important part of political uncertainty. Under the special background “Fiscal Decentralization” and “political promotion system”, the replacement of local officials in China causes more significant political uncertainty. Out of prevention and investment motives, a firm’s cash holdings may be affected, but there is no essay which study about the relationship between the replacement of local officials and corporate cash holdings.In order to study the relationship between the replacement of local officials and corporate cash holdings, this paper select the data about mayor and municipal party secretary as well as China A-share listed companies from 2000 to 2012 as study samples. After study, we get the following results.(1)Replacement of local officials happens frequently in China, so that corporates are facing great political uncertainty.(2)The determination of the a firm’s cash holdings was affected by the replacement of local officials, and the degree of influence has no difference between state-owned enterprises and private enterprises, while it has greater effect on companies at the areas with higher market-based degree. New officials from other places have greater influence on the level of corporates cash holdings.(3)The replacement of local officials has a significant impact on the economic effect of cash holdings, increasing its market competition effect and having a negative impact on the value effect.(4)The degree of economic effect of cash holdings impacted by the replacement of local officials is different between state-owned enterprises and private enterprises, between companies at the areas with higher market-based degree and areas with lower market-based degree..Results above have implications for government when making policies as well as for corporates when making financial behavior choices. According to the main conclusions, several suggestions are given to the government and companies.