Research On The Value Of The Cash Holding Adjustments Of Chinese Listed Companies Under The Financial Constrains

Today, the liquidity management of cash assets is a major part of corporate financial management.Cash holding decision and its economic consequence contribute to the development of the firm. Since Modigliani-Miller(1958) presented the perfect hypothesis of of market information symmetry, more scholars have set their sights on the fact that the market is imperfect. Starting from the question whether company is necessary to hold cash,then gradually lead the cash holding issue to different branches: shareholder value maximizing level(including asymmetry information theory, liquidity needs motivation theory, trade-off theory, pecking order theory) and the interest conflict level between the shareholders and management(including the principal-agent theory, the theory of free cash flow). Besides, the research on value effect(including investment, company operating performance, the company’s market value) of cash holding behavior has become more deepened and perfect.The concept, financial constraints, whose theoretical foundation is based on asymmetry information and the pecking order theory, is born in the era when various theories mentioned above emerged. Since the market is not exactly perfect, when companies needed financing, external financing costs too much and internal financing could not immediately meet requirements, and then, the financial constraints came into being. So, in short, financing constraints actually refer to a phenomenon that companies may be forced to give up some valuable investment opportunities due to significant differences in the cost of internal and external financing caused by the asymmetric information and agency problems.(Fazzari et al.1988)This paper is focused on the economic value level of cash holdings, but the difference between this article and other literature is that this article specially discusses economic value effect of cash holdings adjustments from the perspective of financing constraints. We all know that economic decisions made by individuals are less likely to consider only one factor, so do cash holdings. Many elements affect the behavior of cash holdings adjustments, such as financial constraints, cash flow volatility, hedging demand, economic cycles, and currency policy. The previous articles tend to study the economic value effect of cash holding adjustments decision made after taking into account all these factors mentioned above. But this thesis considers the previous articles in depth, that is, from a single point of view-financial constraints- studying the economic value effect of cash holding adjustments companies made under different degrees of financial constraints.In other words, it’s targeted to determine how large the marginal value in corporations with different financial constraints would be. Such an analysis will not just disprove whether the existence of financial constraints can affect corporate financial decisions, but also help company managements and investors make correct investment decisions.In order to obtain a detailed and objective conclusion, the empirical section of this article uses the marginal value model came up by Faulkender and Wang(2006) and optimal cash holding adjustments model came up by Almeida et al.(2004) for reference, and discusses marginal value of cash holding adjustments under different financial constrains respectively. In the end, this paper draws the conclusion that financial constrains have governance efficiency and agency problems exist in Listed Companies in China.