Empirical Research On The Relationship Between Corporate Governance And Cash Holdings

Cash holdings, as the company’s important financial decision, not only reflects the company’s business strategy and financial strategy, but also is related to macroeconomic environment and corporate governance. In theory, in the of financial crisis, corporate tend to retain more cash within the company. The quality of corporate governance affects the efficient of cash, which in turn affects the value of cash holdings. Then the question is, what is the possible consequence of cash holdings value creating or value destroying, which is investor concern.This paper focuses on two issues:first, with the influence of the financial crisis, what about the relationship between corporate governance and cash holdings; second, what about the relationship between corporate governance and excess cash holdings, as well as the impact of corporate governance on cash holdings and excess cash holdings value.Extending the model of Opler et al.(1999), this paper provides a model of cash holdings, and joined the company governance indicators. Further tests examine the relationship between Corporate Governance and cash holdings. Then using the value regression model of Fama et al. (1998), and the model sample residual cash holdings as excess cash holdings, we research on how about corporate governance affects the value of excess cash holdings.Through the above empirical study, we find:1. In the financial crisis, compared to companies with poor corporate governance, companies with good corporate governance hold more cash. According to plunder theory, enterprises can implement looting policy which is encroaching competitors’market share with ample cash holdings, expel competitors from market who lack of cash, prevent the company from being acquired by another company due to poor management.2. Compared to companies with poor corporate governance, companies with good corporate governance have higher market value of excess cash. Using model estimates, the average market value of excess cash of companies with good corporate governance is between 0.6307 yuan to 0.979 yuan, the average market value of excess cash of companies with poor corporate governance is between 0.333yuan to 0.448 yuan. That is, when corporate governance mechanism is poor, the excess cash holdings could bring the relative adverse economic consequences to company. Also found that there is market value of excess cash discount phenomenon in our country companies.3. Compared to companies with non-financial constraints, the impact of corporate governance on cash holdings and market value of excess cash is more significant in companies with financial constraints. Using model estimates, the average market value of excess cash of companies with financial constraints is between 0.491 yuan to 1.262 yuan, the average market value of excess cash of companies with poor corporate governance is between 0.175 yuan to 0.4063 yuan. It can be seen under financial constraints, the impact of corporate governance on market value of excess cash is more significant.This paper have two inspirations:first, for the protection of shareholders, especially minority shareholders, we should monitor and restrict large shareholders or management the cash holdings decision-making, and establish a sound corporate governance mechanism rather than giving attention to the level of cash holdings. Second, for investors, we should judge the level of the company’s cash holdings combined with the macroeconomic environment and other financial characteristics. Finally, we should focus on the motivation of the managers to hold the cash, which is to maximize the corporate value or just to satisfy the private interest of majority shareholders and management.