Diversification,Political Connection,and Cash Holding

Many scholars compare cash to the blood of a company because cash is the most liquid asset,and it can be seen that cash plays a pivotal role in the enterprise.Cash held by the company is not only used for normal business activities,but also can be invested in projects with positive net present value to bring benefits to the company.Holding too much cash will increase the cost of holding,and if cash is only in the form of money in the enterprise,the contribution to the value-added of the enterprise will be greatly reduced.At the same time,the short-term motive of the major shareholder to the company and the management rent-seeking motive will improve.Holding too little cash will increase financial and operational risks,and capital shortages will miss out on good investment projects,so studying cash holdings is especially important.With the social and economic transformation,most companies in China are diversified,and the company's business strategy needs cash support,so its importance to the level of cash holdings is unquestionable.Whether the company's diversified expansion is a premium,and how it affects the value of cash is worth studying.Based on this,firstly,this paper combs the literature on the theoretical and influential factors of cash holding level and diversification at home and abroad,as well as the relevant literature on cash holding value and political connection.Secondly,this paper takes China's A-share private listed companies in 2008-2016 as the research object,and proposes relevant hypotheses and empirical models to explore the impact of diversification on cash holdings and value,and the impact of political connections on the relationship between diversification and cash holding value.Finally,a mechanistic test is conducted to verify which path the diversification affects the cash value.The study found that:(1)the company holds less cash as the degree of diversification increases,but it also reduces the value of cash holdings.The higher the degree of diversification,the lower the correlation between departments and departments.When faced with environmental uncertainty,it helps to diversify business risks.At the same time,the lower the relevance of different projects,the more time needed at the same time.Cash flows are different.Companies can redistribute funds through internal capital markets to meet the cash flow they need.Therefore,companies do not have the strong incentive to hold cash to prevent risks.Although diversified companies have the advantage of internal capital market,with the increase of diversification,the internal structure of the company becomes more and more complex,the transmission of information may lag and be distorted,and information asymmetry leads to moral hazard of company managers.The diversification of enterprises with high degree of diversification has led to more prominent agency problems.Executives are more motivated to make non-efficiency investments in order to build their own business empire or self-interested behavior such as on-the-job consumption without regard to shareholders' equity.It also gains its own interests by transferring the company's funds more concealed through the complex internal capital structure.The opportunistic behavior of the major shareholders and management consumes the company's internal funds,while at the same time reducing the efficiency of cash use.(2)This paper further divides the sample into politically related and non-politically related to whether the political connection strengthens or weakens the relationship between diversified operations and cash holding value.The results of the grouping indicate that the political association group is diverse.The degree of negative impact on the value of cash holdings is more pronounced.The politically connected companies have lower external financing constraints,and the politically-linked management does not have to bear too much responsibility for their own investment mistakes.This leads to the executives not investing too much in investing,which encourages the inefficient investment of executives behavior.(3)Through the mechanism test,it is verified that the diversified enterprises support the agency theory by increasing the agency cost and thus reducing the cash use efficiency.