Political Connections,cash Holdings,and The Under-investment

There are two main theories: agency theory and trade-off theory to explain why enterprise holds high cash.About the two kinds of theory which can explain the action of the listed company holdings high cash, the research abroad consider that the corporate holding much cash more is to the prevention of the stronger motivation, and less for motivation comes from agency theory explanation.Continuously in the study of domestic some scholars think that compared with the agency theory, trade-off theory is more suitable to explain enterprise the high cash behavior in our country. Company holding high cash is more out of precautionary motive, and more is to prepare for the investment. Studies have shown that external financing is to determine whether private listed companies can invest and develop. The existing financial system is not conducive to private listed companies, and they face the serious financing constraints. When enterprise external financing is more difficult, capital source of enterprise relies on internal cash flow. Under the condition of financing constraints, enterprises hold high cash more is to prepare for investment, so the cash holdings can alleviate the under-investment, to improve investment efficiency. When the private listed companies have a political association, they can access to bank loans and reduce the difficulty of the national policy support, private listed companies of no political association will be more reasonable use of cash in the hand. Therefore, relative to the private listed company of political association, the relationship of cash holdings of private listed company of no political association and under-investment is more significant negative correlation.This article selects the private listed companies as samples to study the relationship between cash holdings and under-investment, and the influence of political association to join the relations of cash holdings and under-investment.By the residual investment model of Richardson(2006), when residual > 0 indicates excessive investment, when residual < 0 indicates lack of investment, among the 4247 samples in the study, there are 2400 private listed companies with negative residual, 1847 private listed companies are right in the residual, samples of inadequate investment accounted for 56.51% of the total sample, it means that the phenomenon of the inefficiency of investment of private listed companies in China is relatively common, and has more insufficient investment.This article mainly research under-investment, so we only investigate the samples of negative residual. Based on negative residual samples, we study the influence of the cash holdings of under-investment, the empirical results show that the significant negative correlation between cash holdings and under-investment, which means cash holdings significantly decrease the under-investment and improve the investment efficiency. We study how politically connected to join to impact the relationship of cash holdings and under-investment. More than 43% of the private listed companies exist political association in our sample.The empirical results found that the interaction of political relation and cash holdings and under-investment is positive correlation, that is to say, in no political connection of private listed companies, the improvement of cash holdings to investment efficiency is bigger, the impact of political connection between cash holdings and under-investment is inhibiting.