The Research Of Peer Effects On Chinese Corporate Cash Holdings

Cash is not only the most liquid corporate assets, but also the lowest profitable assets which is the maintenance of the company’s normal operations and plays an important role. The motivation of cash holdings include transaction motivation and precautionary motivation. Transaction motive emphasizes the potential costs to bring the non-current assets into cash. That is to say the company must hold cash in order to meet transaction motivation. Precautionary motive emphasizes that when investment opportunities in companies can not fully disperse the risk of future cash flows, it is necessary to save cash in the current to prevent future contingencies or need to grasp opportunities that may arise in the future in favor of enterprises. Subsequent research provided theories of corporate cash holdings such as trade-off theory, finance orderly theory, dark bags theory and agency theory.Past research has focused on the study of factors that may explain why corporate holds cash, the factors that effect the cash holding level and why there are different levels of corporate cash holdings. Research shows that factors including enterprise scale, static book value, financial leverage, capital expenditures, dividend payout ratio and so on may influence the level of corporate cash holdings. In different sectors of the industry the enterprise will hold different levels of cash holdings due to the different characteristics of the industry.This paper studies the peer effects of Chinese Listed Companies cash holdings. When a company decides its cash holding level, it will often consider that of rivals cash holdings. Corporate cash expenditure and income meet with some uncertainty in the daily activities of enterprises. When there is an investment opportunity in the market or a sudden need of expenditure for corporate research and development departments, the level of cash held by corporate not less than the level of competition can prevent the opportunity from being taken away because of lack of cash holdings. However holding more cash than competitors would lead to higher costs. As a result taking a similar cash holding strategy enables enterprises to maintain a certain competitive situation in the competition. This paper will based on the research interests of Chinese enterprises cash holding and previous research and explore the peer effects on cash holdings. We believe that the cash holding strategy of Chinese listed companies is similar to that of listed companies in the U.S., there exit peer effects on cash holdings. If a company holds less cash holding than rivalries, it may lose potential opportunities. If it holds more than its rivalries, there would be more cost caused by holding cash. Therefore, it is a wise choice for the company to maintain a similar level of cash holdings to its competitors. Further, we verified the companies facing with uncertainty of cash supply and spending, namely financial constraints or a higher proportion of R&D, will tend to exhibit more peer effects. Companies facing with financial constraints are difficult to get cash from outside, it is necessary for them to hold a certain amount of cash against contingencies. Companies with higher proportion of company R&D spending, the number of payments due to the presence of uncertainty and instability point spending R&D spending, the company’s cash holdings policy can not be determined according to the number of R&D expenditures. Companies with higher proportion of R&D spending companies face uncertain cash expenditure. The company under financial constraints face financing difficulties. So when these two types of companies make decisions of cash holding strategy, due to limitations of internal factors they tend to consider factors affecting cash holdings from the outside environment. Intuitive, they imitate the level of cash holdings of their rivalries and maintain a similar cash-hold strategy each other.