Research On The Determinants And Value Effect Of The Cash Holding Adjustments Of Chinese Listed Companies

Why do firms save cash? In other words, why do firms turn cash flows into low-return liquid assets, other than high-return productive assets or paying back to shareholders? Is it helpful or harmful to firms’value? This seemingly easy problem is actually hard to answer. Therefore, the problem of cash holdings has become an important theme in corporate finance research. Scholars domestic and abroad have done a lot of theoretic and empirical researches, and acquired plenty of fruits. However, various opinions show the immaturity of cash holdings studies, and the room to probe deeper.In the ideal world of MM theorem, firms’reasonable need for fund can be met by external finance, and they do not have to hold cash. Therefore, the main determinants of corporate cash holdings are surely related to financial constraints. This dissertation, from the perspective of financial constraints, focuses the adjustments of corporate cash holdings varying with time, and simplifies the its theoretic analysis through the concept of transaction cost in neo-institutional economics, and takes related empirical studies according to the characteristics of Chinese corporates’finance practice. The dissertation discusses the adjustments of corporate cash holdings from2aspects:determinants and effects, aiming to solve2questions:What are the main determinants of the adjustments of corporate cash holdings? What are the actual effects on corporate’s performance in capital market by changing cash reserve?There are9chapters in the dissertation, whose structures and contents are as follows:Chapter1, introduction, illuminates the object, background, purpose and methods of this research, and summarizes the dissertation’s basic thought and frame, the main innovation and contribution.Chapter2reviews the literatures related to corporate cash holdings. Firstly, we introduce and comment a series of theoretic analysis on cash holdings, then categorize and review the studies about cash holdings determinants and effects in recent decades. We specially introduce the domestic researches on Chinese listed companies. Finally, we make brief comments on cash holdings studies.Chapter3generally investigates the characteristics of Chinese listed companies’funding problems and the status quo of their cash holdings. Firstly, we research the characteristics of corporate finance and its Institutional background which is tied up to financial constraint problem. Secondly, we investigate the status quo of Chinese listed companies’cash holdings from the aspects of funding sources, time-series characteristic, industry, corporate size and equity nature, etc. By researching those basic facts and characteristics above, Chapter3provide realistic basis for the theoretic and empirical analysis in sequent chapters.Chapter4, based on a perspective rarely used by related literatures: transaction cost theory in neo-institutional economics, theoretically analyses the financial constraints and corporate cash holdings. After discussing the endogeneity of financial constraint problem and its connection with the concept of transaction cost, we point that cash holdings are substitutes for external finance, which can lessen the reduction of investments’NPV caused by transaction cost. On the basis of those above, we analyze the cost and revenue of cash holdings, and theoretically deduce the behavior of corporate cash holding adjustments. Finally, we analyze and categorize the source of transaction cost in external finance, according to which we put forward general ideas of empirical studies.Chapter5investigates the impact of financial constraints on the behavior of corporate cash holding adjustments in the micro level of firms. Using related literature’s idea for reference, based on the interest premium in firms’debt finance, we construct a "debt finance premium" which can measure the extent of financial constraints, and we use it to test the behavior of corporate cash holding adjustments. The regression result proves that cash holdings are substitutes for external finance, and the severer the present financial constraint is, the more willing to use cash reserve the corporate is, in order to lessen the reduction of corporate value caused by transaction cost in external finance.Chapter6investigates the impact of changing financial constraints on the behavior of corporate cash holding adjustments in the macro level of central bank policy. We use the change of macro credit policy to indirectly measure the change of corporate financial constraints. The empirical result shows that when macro credit policy becomes loose, the corporates’loan added does not convert to cash; when macro credit policy becomes tightened, corporates seek to increase cash holdings. It proves that the trend of the transaction cost change in external finance is positively correlated with the change of corporate cash holdings. Meanwhile, we take some firm’s characters affecting transaction cost in external finance as grouping variables, which deepens this chapter’s empirical analysis.Chapter7investigates the impact of financial innovation on the behavior of corporate cash holding adjustments in the institutional level of financial development. Because non-market financial institution is one of transaction cost sources in external finance, result in severer financial constraint, market-oriented financial innovation will surely improve corporate financial constraints. We use "the introduction of short-term financing bonds in2005" as a natural experiment, and analyze with differences-in-differences method, whose result shows that market-oriented financial innovation significantly affect the behavior of corporate cash holding adjustments by improving corporate financial constraints.Chapter8, combining factors of financial constraints and agency conflicts, investigates the impact of the behavior of cash holding adjustments on corporate value in capital market. Taking the concept of "excess cash holdings" in related literatures as reference, we define a variable of "excess adjustment of cash holdings" and apply it to regression analysis. The result indicates that both positive and negative excess adjustment of cash holdings reduce the marginal value of cash, which means that the marginal market value of the behavior of cash holding adjustments may not monotonously increase or decrease with the amount of cash. It indirectly shows that the behavior of cash holding in a lot of Chinese listed companies is not aiming to maximize shareholders’value, and agency problem exists. It also indicates that agency conflict not only causes overmuch adjustment of cash holdings, but also inadequate.Chapter9, conclusion, summarizes the basic conclusions in all chapters above, and points out the shortages of the dissertation and the directions further researches can expand in the future.Compared to related studies, the dissertation’s contributions and innovations may exist in3aspects: 1. By theoretically analyzing the financial constraints and the behavior of cash holding adjustments from the perspective of transaction cost, we deepen the understanding of financial constraint problem, on the basis of which we empirically study the main driving factor of cash holding adjustments.2. We empirically study the main driving factor of cash holding adjustments with new methods in3levels respectively:micro firm, macro policy and financial institution. Specifically, in micro level, it is the first to apply the concept of "debt finance premium" in related literatures to the empirical study of corporate cash holdings; in macro level, we use the change of macro credit policy as the indicator of the change of transaction cost in external finance, which properly measures corporate financial constraints in credit market; in institution level, considering the financial innovation in China’s financial development, we use the method of natural experiment, further avoiding the impact of endogeneity.3. Enlightened by the concept of "excess cash holdings’’in related literatures, we construct a variable of "excess adjustment of cash holdings", and investigate the impact of the behavior of cash holding adjustments on corporate value in capital market, indirectly proving that the effect of agency conflict on the change of cash holdings can be double directions.