An Empirical Study On Cash Holdings' Motives And Investment&Financing Behavior Of Listed-Firms In China

Cash is the most liquid asset and is the lowest profitable asset, it playes an important role in corporate finance. There are two main benefits from holding cash. First, the firm saves transaction costs to raise external funds and does to have to liquidate assets to make payments. Second, the firm can use cash holdings to finance profitable investment and pay for unexpected payments. That is Keynes (1936) described as the transaction cost motive, the precautionary motive for holding cash. At the same time, however, there are two main disadvantages of cash holdings. Including: the lower rate of ruturn of cash holdings and agency cost of managerial or majority shareholders' self-interest. So, corporate cash holdings are influenced by the tradeoff among the corporate stakeholders.During 1994-2003 in Shenzhen and Shanghai Stock Exchange, the average of cash holdings is 26.3 billion RMB, which is almost 21.68% of net assets. Compared with the largest corporations around the world, averge cash holdings in china is small. However, cash holdings to net assets in china are much larger than the largest corporations around the world. At the same time, institutional context in china is very special. (1) The level of information asymmetries is higher and stock market develops slowly, which would increase the cost of outside funds and force corporates to increase transaction and precautionary cash holdings. (2) State-shares are largest and the owners are default, which would stimulate managerial self-interesting motive. At the same time, the law provides to minority shareholders' proction is low, corporate's ownership concentration is high, which would stimulate majority shareholders' self-interesting motive. (3) Managerial ownership is very low and managerial market doesn't lie, which would stimulate self-intesting motive of cash holdings and its' use.Whether transaction cost motive, precautionary motive and self-interest motive mutually explain cash holdings in china? The relative part of cash holdings can be explained by transaction cost motive or precautionary motive and by self-interesting motive. And excess cash holding would have an effect on corporate' investment and financing behavior? To answer these problems, we select listed firms which...