The Relationship Between Cash Holdings And Operating Performance: Evidence From China Listed Companies

Decisions on cash holdings play an important role in corporate financial operations like financing, profit distribution, etc., and also have close relationship with agency costs and corporate governance. Financial constraints and agency costs are two main factors that are decisive to the impact of cash holdings on company's operating performance. However, the latest research without separating the contrary impacts of these two factors drew a self-contradictory conclusion that large cash holdings have no impact on firm's performance, but do destroy firm's value. China's listed companies are confronted with relatively more serious financial constraints and agency costs, which gives more sense to researches on cash holdings modes of these companies and helps us to separate the impact of financial constraints and agency costs on company's performance.According to our statistics, high cash holding is a common phenomenon among China's listed companies. Upon this, we analyze the two potential motives behind high cash holdings of China's listed companies both theoretically and empirically by following up the clue of financial constraints and big shareholder's interest occupation. After separate the opposite impact of these two motives on company's operations performance, we explain the relationships between high cash holding act, excessive cash holding and operations performance.Main contributions and conclusions from this paper are as follows:(1) We first define the proxy variables for financial constraints and big shareholder's interest occupation situation. Then we analyze the impact of these factors on corporate cash holding decision and excessive cash holding level, so as to identify what the real motive for high cash holdings of China's listed companies is. The empirical test finds that companies confronted with financial constraints show strong preference to high cash holding and the stronger the debt financial constraints, the higher the excessive cash holding level, while companies with serious big shareholder's interest occupation problem have no such preference as what we have expected.(2) By dividing the sample companies into different groups according to the seriousness of their financial constraint and big shareholder's interest occupation situation, we explore the non-monotonous linear relationships between high cash holding act, excessive cash holdings and company's operations performance. Empirical study indicates that high cash holding act only benefits those financial constraint companies. And excessive cash holding plays the most positive role in financial constraint companies without big shareholder's interest occupation problem. For those companies confronted with both financial constraints and big shareholder's interest occupation problem, the amount of excessive cash holdings must be evaluated by the trade-off between the benefit from lower operations risks and the deterioration by big shareholder's occupation.The innovation of this paper comes from two aspects: (1) We try to separate financial constraints and agency cost, and make sure how they impact the high cash holding act of China's listed companies. Considering the distinguishing features of China's market, we find proper proxy for financial constraints and big shareholder's interest occupation situation。(2) On the basis of separating the opposite impacts of financial constraints and agency costs, we analyze the relationships between cash holdings and company's operations performance more accurately.This research will not only theoretically enrich the cash holdings theory and discuss the role of cash holdings in corporate financial decisions, but also practically improve corporate financial decision making.