Research On The Impact Of The Level Of Cash Holdings On Corporate Value

Cash is the lifeblood of business survival and development. Enterprises have to possess the cash to perform a series of operations, such as pay for normal daily operations, repayment of interest due and to pay taxes. Moreover, enterprises have to possess the cash for financing investment, distribution and other management activities. Therefore, the cash is an essential economic resource for companies, and in large part directly determines the success or failure of the business. When the financial crisis hit the United States in2008, a large number of enterprises have been closed down because of lacking financial flexibility. In this case, the "truth" of "cash is the king" is more worshiped by the business community than ever before. So, why it is so welcome by corporate cash managers and shareholders, and what an important role it plays in the enterprise? More importantly, how the level of cash holdings affects the value of the enterprise? In order to solve the above problems, this paper will discuss in depth about the related question of cash holdings and how it affects the enterprise value.Because cash is so important to the enterprise, its research is of course essential. Although research in all areas of cash holdings have already begun and obtained the corresponding research results, the outbreak of the U.S. financial crisis in2008sparked more enthusiasm concerns of its researchers. As early as the1930s, many Western economists have begun to study the behavior of cash holdings. Keynesian first put forward the theory of demand for money in his book "Employment, Interest and Money". He held that there are three motivations for the business to save Cash:transaction motivation, the speculative motivation and precautionary motivation. Although this theory cannot be directly used to explain the behavior of corporate cash holdings in the real life, it has laid a solid foundation for the research of that time and later studies. The trade-off theory, pecking order theory, and asymmetric information theory are more or less inspired by this theory.In recent years, domestic and foreign cash holdings economists mainly focused on the issues of two aspects:the affecting factors of cash holdings and the worth of cash holdings, while involved less research on the impact of cash holdings level to enterprise value. However, the ultimate aim of studying the cash holding problem is to create value for the enterprise and bring greater benefits to investors and other corporate stakeholders, so scholars should pay more attention to the research of this area.The most widely used method for current research of cash holdings is empirical research, and have a lot of instructive conclusions. This paper is focused on the innovation of research methods, and broaden the range of cash holdings in the field of its research, hoping to result in more useful conclusions for the business. Therefore, our study intends to combine the standardized methods and case analysis, while mainly focuses on the standard research, and the case studies just describe normative research theory and applications. Firstly, the theory of cash holdings level affect the corporate value was analyzed and summarized. Then, its deep logical reasoning is obtained based on the establishment of certain mathematical expressions, using certain data, charts, and other auxiliary tools of this theory to further confirm the correctness of the theory. By analyzing the theory based on mathematical formulas, and then using some relevant case application of the preceding theory, we show the correctness and practicality of the description of theory.This paper studies the relationship between excessive cash holdings and enterprise value based on the static trade-off theory of cash holdings, the pecking order theory, agency theory and the theory of free cash flow, combined with special backgrounds and legal systems of China’s capital market, in order to draw conclusions that too high or too low level of cash holdings will adversely affect the enterprise value. Therefore, company should hold a reasonable level of cash to get more enterprise value. So, how to maintain optimal cash holdings level? First, we analyze the relationship between the unreasonable level of cash holdings and the reduction of enterprise value, and then summarize the measures for the optimal cash holding level from these reasons. Finally, the conclusions are drawn in this paper, and the shortcomings of this paper and future research directions are summarized based on the previous analysis.There are four innovations in this paper: (1) First of all, this paper studies how the cash holdings affects the level of corporate value from the perspective of normative study. It has solid theoretical basis, reliable conclusion, thus is significantly different from the popular empirical research analysis.(2) Secondly, this paper studies the influence of the too much and too little cash holdings on corporate value from three aspects:the investment, financing and dividends allocation, which provide guidance for our corporate cash holdings behavior and decision making.(3) Third, by analyzing the root of business value from cash flow, cost of capital and the share price, we have a deeper understanding on the creation process of the enterprise value and provide a better method of creating wealth for the enterprise.(4) This paper has defined the standard of excess cash holdings and cash holdings shortage for our country’s enterprises. Moreover, it illustrates that there exists excess cash holdings and cash holdings shortage phenomenon in our country by the average cash holdings level of the top50of our country’s manufacturing industry.Although this paper have made a breakthrough in the field of cash holdings, there are still some deficiencies due to the limitation of my own research level:(1) This paper focuses on the impact of cash holdings on corporate value and the level of cash holdings, analyzes the irrational reasons of cash holdings and gives the measures on how to keep the optimal level. However, it did not give a reference level of cash holdings values or reference ranges.(2) In order to highlight the key points and space limitations, this paper mainly deals with investment, financing and distribution of financial management, yet not analyze the impact of cash holdings on corporate value from a business point of view.