External Financing Constraint, Corporate Diversification And Cash Holdings

As an important part of assets in the enterprise, Cash holdings has always been the hot spot of the academic and corporate research, it is not only affect the corporate normal operation, such as pay for raw material, pay for various taxes and pay for employee compensation, but also relate to corporate big financial behavior like investment, fund raising and dividend, etc. Excessive cash holdings will reduce the income level, leading to high opportunity cost, and less cash holdings are easy to cause the enterprise financial crisis or lose good investment opportunities, affecting the survival and development of the enterprise. So the appropriate cash holdings for enterprise survival and development and reduce the management risk is particularly important. There are many factors affect cash holdings, the domestic and foreign researcher have researched from different factors, such as corporate financial characteristics, governance factors and the market environment, but few scholars study from the perspective of enterprise operation strategy, especially the corporate diversification behavior. At present, with the rise of corporate diversification strategy, the efficiency of internal capital markets and the agent problems associated with corporate diversification has become an important research field and hot academic circles at home and abroad. Under the background of diversification, the effect of resources allocation and agency problem in the internal capital market will inevitably affect the company’s cash holdings level and value, so studying on the relationship between diversification and cash holdings have become an urgent need of reality. However, the source of funds includes the internal capital market financing, and also includes the external capital market financing, as an important financing channel, external capital market financing plays a decisive role in the allocation of capital. Under the reality of imperfect capital market, difference capital cost from inside and outside makes companies face different financing constraints, which caused by asymmetric information, principal agent, transaction costs and other factors, while the external financing also affects and restricts the development of internal capital market, external financing constraints is closely related with corporate cash holdings. Therefore, this article study from the perspective of internal and external capital market, with the external financing constraints, the relationship between diversification and cash holdings as the research content of this article.Based on the preliminary analysis about the influence of corporate diversification on cash holdings, this article studied the influence relationship among external financing constraint, corporate diversification and cash holdings by the combined methods of normative research and empirical research, making an exploratory look at this three together. Specifically, this article tries to analyses whether the diversification affect cash holdings and the influence of diversification to cash holding value in the different degree of external financing constraint, which will make an effectively guidance to the enterprises behavior.This article makes an empirical study on the data of external financing constraint index、diversified index and related financial indicators data, which based on the listed companies from2008to2012on stock market of Shanghai. This article discusses the influence of diversification to cash holdings, on this basis, then makes a further step to explore the relationship among the external financing constraint、diversification and cash holdings.On the research on the above problems, this article draws the following main conclusions:First, diversification and its degree is one of the important factors that influence the level of corporate cash holdings, a diversified operating company’s cash holdings is significantly lower than that of specialized companies, and corporate diversification and cash holdings are negatively related.Second, compared with the high external financing constraint enterprise, the degree of diversification’s negative effect to the level of cash holdings is more significant in the companies of lower external financing constraint. The innovation of this article is better explain the cash holdings from a new perspective of diversification strategy and the source from the cash, and put the external financing constraint、diversification and the level of cash holdings in a analysis framework, considering the influence of the enterprises’internal and external factors on corporate cash holdings level, expand the research ideas about the factors affecting cash holding level. However, for the capacity limitations on the empirical study, the limitations of this paper is that it study the effects of holding cash in external financing constraints only in accordance with the external financing constraints degree of two groups of financing constraints and non financing constraint, and then studied the relationship between diversification and cash holding level, simply verified the results. Study on external financing constraints can be made more detailed research in the future.