Institutional Background,Internal Capital Market And Corporate Cash-holding

Cash-holding has always been an important part of the company’s financial decision-making.The capital market is far from perfect in real life,and the cash holding will affect the value of enterprise.Since the 2008 financial crisis,a large number of enterprises went bankrupt due to shortage of funds,while other companies,which have captured the “value effect” due to their large amounts of cash holdings,have pushed the study of cash holding to a climax.There are deeper incentives that would affect companies’ cash holding decisions.According to Pecking order theory,the vast existences of information asymmetry and financial friction have leaded to the high external financial costs.Therefore,substantial amount of cash holding could be an effective alternative when exogenous financing cost is high(Myers and Majluf,1984);Jensen(1986)has put forward the Free Cash Flow Hypothesis from the perspective of agency costs.He found that the managerial level tend to hold large amount of cash for the purpose of self-interest.Due to the widely exist of information asymmetry in the process of agency,those cash holdings could be excessively invested in building their empires,or enjoy perquisite consumption.The following-up researches focus on the factors that influence the cash holding of enterprises based on the theory of optimal sequence financing and agency theory.Based on Pecking order theory and agency theory,the follow-up studies have focuses on factors that influence the company cash holding from macroscopic views.Love(2000)points out that company tend to hold more cash in countries with less developed financial market,which impose higher financial costs and constraints.And a study by Xingquan Yang and Zhaonan Zhang(2009)found that company’s cash holding level is positively related to the institutional environment(using the marketization index and legalization index),and proved the free cash flow hypothesis.In fact,enterprise production and business operation activities are all born in their particular institutional background.When facing the imperfect external capital market,relieving financing burden through the construction of internal capital market has become an important option for enterprises.In emerging market country such as China,the imperfect external capital market and the lack of efficiency tend to increase the external transaction cost of enterprises.Many companies are facing strong financing constraints,which depress the value creation of enterprises and the economic development of the whole society.The initial purpose of building enterprise internal capital market is to ease the financing constrains.But there was no consensus as to whether the internal capital market is effective.Shao Jun and Zhiyuan Liu(2008)have revealed that through internal capital allocation,enterprise group can relax the financing constraints faced by its members.Other research has shown that,the agency conflict between top CEO and department manager has alienated the internal capital market into a rent seeking market of department manager(Scarfstein and Stein,2000).At the same time,the agency conflict between controlling group and the external small and medium shareholders can turn the internal capital market into a channel of siphoning profit(Lu Jianxin,2009).It is thus clear that the internal capital market will have an impact on the financing constraint and agency cost,which will affect the cash holding of the enterprise.It’s worth noticing that enterprises in emerging/transition economies would face financing constraints,which often closely associated with the institutional background of the state.The difference of enterprise property rights and product market competition would impose a deep influence on its financing constraints and agency costs(Zhu Ji Gao and Liu Zhengfei,2009).This provides a perfect exogenous variable for us to explore the relationship between internal capital market and cash holdings.Based on Agency theory,Financing constraint theory,Trade-off theory and information asymmetry theory,this research has discussed the influences of internal capital market on listed company’s cash holding decisions under the institutional background of Chines economy,and placed emphasis on the operation condition status and function exertion.Both the normative research method and empirical test method have been applied in this paper.First,it illustrates relevant theories,and discusses problems emerged in enterprise’s internal capital market in China including its operation mechanism,easing the financing constraint,and the impact of cash holdings strategy etc.Second,using A-share listed companies in 2004-2016 as study samples,empirical test is carried out to the exam the behavior and consequences of the internal market and enterprise cash holding: first,examine the effect of internal capital market on cash holdings and cash holding value;Second,Validation of internal capital market impact on corporate cash holdings strategy.Namely,to test whether the cash holdings behavior is affected through ease enterprises financing constraints,and thus reduce the value of the cash holdings effects.Third,attest the influence degree of internal capital market on corporate cash holding strategy under different property rights.Fourth,testify the effect of internal capital market on corporate cash holding strategy according to the competition intensity of the product market,and the following conclusions are drawn:(1)The internal capital market plays an important role in safeguard both the internal and external financing of the enterprise group.It alleviate the financing constraint problem that faced by enterprise members.Therefore,the amount of cash held by companies for precautionary motive will fall.At the same time,as transaction costs decrease,opportunity costs increase and agency costs fall,the firm’s internal capital markets are negatively correlated with its cash holdings.The internal capital market is an effective substitute for the imperfect external capital market and interacts with the external capital market,thus affecting the cash holding value effect of the enterprise.According to trade-off theory,the internal capital market makes it easier to raise money for its group members both externally and internally.As easing of the financing constraints,and the “winner-picking” process of the internal capital market,enterprises will have more,and better,investment opportunities.The enterprise’s internal capital market reduces the cash holding value effect.(2)The degree of financing constraint is the main factor that influences the company’s cash holding motivation and its value effect.The combination of abundant external financing and relatively small growth opportunity could possibly lead to the first type of agency conflict.So,the economic consequences of the internal capital market are mainly reflected as the agency cost.In view of China’s capital market,the imperfect external capital market makes many companies face resilient financing constraints.Therefore,in China,the internal capital market should mainly reflect the effect of easing the financing constraint.The internal capital market operates by alleviating the financial constraints to reduce the cash holding and value effect.Through the empirical analysis,we found that the negative correlation between the internal capital market and the cash holding behavior and its value effect is more significant in the enterprises with high financing constraints.(3)The availability of external financing for private enterprises is low and it is more likely to choose other alternatives(such as building internal capital markets)to ease the financing constraints.The strong external financing ability will cause the state-owned enterprises to be less sensitive to enterprise group factors when it comes to make cash holding decision,while private enterprises is more sensitive to such factors.The negative correlation between internal capital market and cash holdings is more significant in private enterprises.However,the competition effect of the reduction of cash holdings in the product market will likely reflect in the capital market and reduce the value of cash held by state-owned enterprises.The negative correlation between internal capital market and value effect of cash holding appears more significant in private enterprises.(4)The effects of predatory risk and external governance of the product market competition have opposite effect on the level of corporate cash holding.In the case of the general financing constraints of Chinese enterprises,the effect of predatory risk is relatively obvious.While in the enterprise group,this paper holds that the external governance effect of product market competition is dominant.The empirical results show that the product market competition in the enterprise group mainly play the role of the external governance mechanisms,and can strengthen negative effect of the internal capital market on corporate cash holdings level and value effect.Through theoretical analysis and empirical test,this study has some reference and enlightenment to the healthy development of China’s internal capital market and the adjustment of cash holding strategy,which can be specified in: first,for large listed companies with high financing constraints,internal capital marker should engage vigorously in capital financing and allocation,and play its role in easing financing constraints and lower the cash holdings of listed companies to reduce the rate of return on total assets.Second,due to the high degree of financing constraints,private enterprises should constantly improve and perfect the corporate governance level,reduce all kinds of agency costs,thereby reducing the bad influence of agency problem on the its investment decision and exert the better financing effect of the internal capital market.Third,as the cooling down of intense market competition,the internal capital market can play the role of external governance mechanism,and ease the pressure caused by cash holding strategy.Forth,China has been working constantly on improving its external financial environment,enhancing the regional financial development and building a good financing and investment platform for the country’s listed companies,so as to promote so as to promote the benign development of listed companies and value creationFuture research can further analyze the relationship between internal capital market and the corporate cash holding and pay closer attention to the influence of internal capital market efficiency on corporate cash holdings behavior,the value effect and strategic effect.