Empirical Research On The Impact Of General Corporate Governace On The Amount And The Market Value Of Excess Cash Holdings

Cash holding decision is a piece of important decision on corporate finance. Brealey and Myers (1996) stated that it is one of the ten puzzles unsettled in the financial research field. Firm cash holdings not only reflect the firm's financial strategy and operating strategy, but also are related to the corporate governance and institutional environment. In theory, it is excess cash holdings that corporate governance will influence. And also, investors will pay more attention to the question that what is the possible economic consequence of the cash holdings—value creating or value destroying.This paper focuses on giving two answers:first, the relationship between the level of general corporate governance and excess cash holding; second, under different levels of the corporate governance, will the market value of excess cash holdings differs from each other.Extending the model of Opler, Pinkowitz, Stulz and Williamson(1999), this paper provides a more comprehensive model of expected cash balances and finds evidence supporting a static tradeoff model of cash holdings. Further tests examine the relationship between the level of general corporate governance and excess cash holding by using the residual of the cash holding model as excess cash holding and measuring the level of general corporate governance by constructing government index. At last, use the value regression model of Fama and French(1998) to study the impact of general corporate governance on the market value of excess cash holdings.The conclusion and contribution of this paper are as follows:1. Firms with a higher return on assets, higher liquid debt, more invest opportunities and more tend to hold more cash in hand. On the other hand, big firms with a higher debt ratio, free cash flow, higher volatility in operation cash flow, cash substitutions and cash dividends have a negative impact on corporate cash holdings.2. Due to the great differences of economic environment and institutional background, this Paper find corporate governance is positively associated with excess cash in China. Under the good corporate governance, shareholders can monitor managers, behaviors effectively and thus allow the managers to stockpile more to take advantage of the investment opportunities. But on the contrary, if the firm has bad corporate governance, the managers will spend excess cash when generated. This paper provides new evidence on the relationship between the corporate governance and excessive cash.3. This paper further investigates the relationship between the corporate governance and market value of the cash holdings in China. The result shows that corporate governance has a substantial impact on the firm's value through its impart on cash. The well-governed firms have a higher market value of excess cash. This paper finds that firms with Poor corporate governance wastes excess cash resources and thus destroy firm value. The evidence tell us that a well governed firm has its excess resources better "fenced in" and matter very little whether a firm holds excess cash-if it is well governed.From the perspective of shareholders, especially the minority shareholders. The important thing is not the levels of cash holdings, but the effective mechanism to monitor the managers, sometimes the controlling shareholder, how to use the cash. The implication to investors is, when they attempt to judge a firm's cash holdings, they should pay more attention to the combination of the developing stage of the firm, the investment opportunity, the degree of the financial leverage and the other financial characteristics. In additional, they should foeus on the ineeniive of the managers to hold the cash, which is to maximize the firm value or just to chase private interest of them.