The Level Of Corporate Governance, Cash Holdings And Firm Value

The decision of Cash holdings has always been the core issue in the field of corporate finance, and "cash is king" is the golden rule of financial managers. Especially after the2008U.S. subprime crisis turning into a global financial crisis, the public have become generally concerned about cash holdings. The sufficient cash on hand meet the needs of its operating and investment activities, implement the company’s development strategy efficiently, and avoid paying the high cost of external financing debt More importantly it conveys the signal that company operates in good condition by the way of paying cash dividends. The cases of foreign bankruptcy of Lehman Brothers and financial crisis of the U.S. auto industry giants, all of them illustrate the importance of cash assets. However, it is assumed that whether the company would benefit from as much cash on hand as possible. The theory of asymmetric information and that of pecking order believes cash on hand would increase the value of the company. Specifically, the cash flow of Alibaba raised a40percent growth in the first half of2009; Yu Liang, the CEO of VANKE, claimed that "cash is king." in public. It is silently supported that firm hold cash as much as possible by those cases. Obviously, high liquid of cash is valued; at the same time, the minimum yield is neglected. Idle funds do add opportunity cost. Plus free cash flow hypothesis and agency cost theory also explain that it is detrimental to company that managers overstate cash on hand for self-interest. Therefore there is no wonder Brealey and Myers (1996) proposed that the amount of cash holdings is one of the most difficult problems unsolved in financial area.In the1990s, scholars have begun to study the decision of cash holdings. Considerable researches demonstrate these determinants of cash holdings and their economic consequences. Unfortunately, no agreement of the results has reached. The scholar Mikkelson (2003) argued that firms produced higher profitability as a result of high-profile cash on hand. But the results of Schwetzler et al (2004) are opposite. The cash holdings of companies are good or bad? What impact on the value of the company? Furthermore, high liquid of cash determines its free disposal and random occupation. As a result o f delegation from owners to managers, managers would possible peruse self-interests at a cost of giving up shareholders’as a whole by way of manipulate cash. To control this risk, corporate governance mechanisms are placed in a prominent place. The research on the impact of corporate governance to the relationship of cash holdings and the value of company are quite fewer, from the perspective of company microscopic system.Therefore, this article will embed corporate governance, cash holdings, and the value of the company into one framework. Relying on the special institutional background in China, it selects the relevant data of listed companies as samples, calculates the level of the comprehensive management of the company from the foundation in the use of principal component analysis. The paper will works on the study of three questions with the method of combining theoretical analysis and empirical research:(1) how the level of corporate governance influence the cash holdings;(2)how cash holdings affect the company’s value;(3)whether different level of corporate governance have different influence on the relationship between cash holdings and the value of the company.The contents of this paper include mainly six chapters as follows:The first chapter is Introduction. According to the research background of this paper, it briefly illustrates its research significance, the main content of the paper, research methods, framework arrangement and finally its contribution in this paper.The second chapter is literature review. Based on the literatures of cash holdings, this paper summarizes the research achievements of review which are divided into3phases:the influence factors of cash holdings, its economic consequences, and the relationship between corporate governance and corporate value, indicating the research emphasis in this paper.The third chapter is the theoretical analysis. The first is to comb related basic theory of this article; the second is to define corporate governance, cash holdings and the value of the company; Finally, based on the above discussion, it interpret the relationship among corporate governance, cash holdings and corporate value from a theoretical perspective, to lay the theoretical foundation of this article. The fourth chapter is the study design. First of all, on the basis of literature and the analysis of basic theory, it puts forward the research hypothesis. Secondly, it illustrates the selecting principle of samples and the definition of the variables, and builds the model of corporate governance and the model of cash holdings cash holdings and corporate value, in order to test the hypotheses proposed in this paper.The fifth chapter is empirical analysis. Firstly, according to the theory of the third chapter, this paper analyses and calculates the comprehensive management level of the sample company. The second is describing statistics of the sample data, which include the analysis of status quo of the listed company’s cash holdings. By the industry and divisions descriptive statistical analysis was carried out on the cash holdings of listed companies in our country, in order to more fully understand present situation of cash holdings. According to the fourth chapter it puts forward the research hypothesis and so on, finally analyses systematically the regression results.Chapter VI is the conclusions and policy recommendations. According to the results of the empirical analysis in this paper, we obtain the conclusion of it and the enlightenment about the governance of listed companies in our country. And from the perspective of cash holdings, it offers good idea to improve the relevant level of corporate governance, at the same time it also points out the limitations of this research.The main conclusion through empirical research is as follows:Firstly, after the mean as the boundary is divided into two groups after analysis, we draw the conclusion:the overall level is low, and the individual gap is large. In the reference to literatures at home and abroad and on the basis of the evaluation system of corporate governance of the University of NanKai, we calculate the comprehensive management level of the samples, selecting the ownership structure, ownership concentration, the board of directors and the board of supervisors, managers and the shareholders meeting, a total of16variables in five dimensions, and using principal component analysis (PCA).Secondly, the level of corporate governance and cash holdings are significantly positive correlated. Good corporate governance can play its institutional constraints function, solve effectively or alleviate the problem of agency costs, and prevent self-interested behavior management, so that it assists firms to hold more cash from operations. On the other hand, when the level corporate governance is poor, corporate cash management may be to provide a convenient way for the pursuit of self-interest of managers, and cash is the most liquid asset; managers are easier to manipulate it directly.Thirdly, the relationship of the amount of cash holdings and the value of company is nonlinear, which is an inverted U-shaped. In the case of a cash shortage, information asymmetry brings high external financing costs, and the pecking order makes listed company select internal finance to grasp the opportunity to help them enhance the value of the company with high volume of cash. Along with the gradual increase in cash holdings, it is easy for agent to seek self-interest, and then harm company interests.Fourthly, the level of corporate governance has a significant impact on the relationship between cash holdings and firm value. Nowadays, China is in the period of economic reform, asymmetric information causes difficult external financing relatively, so higher cash holdings improve companies to grasp the favorable opportunity to enhance corporate value. Good corporate governance can effectively solve or alleviate the problem of agency costs, so that the company cash holdings is management’s "hotbed" no longer to increase personal gain, really create value for the company.The contribution of this study is mainly reflected in the following aspects:Firstly, Starting from the calculated overall level of corporate governance, the paper does research the relationship between the level of corporate governance and corporate cash holdings affect the value of the conclusions from a new entry point to emphasize the importance of corporate governance system. Most existing research started in cash holdings factors and economic consequences. But this article is out of this circle, starting from micro-system characteristics, the three questions come into the research framework.Secondly, research contents are innovative. The paper has calculated the overall level of corporate governance by using principal component analysis (PCA) in order to support the subsequent empirical research in it. The paper will study the effect of corporate governance on the basis of the nonlinear relationship of cash holdings and the value of the company at the moment. However, those existing literature study the influence of corporate governance factors only through the linear relationship of cash holdings and the value of the company.