External Enviroment, Cash Holding And Enterprise Value

Due to the2007Economic Crisis, the company’s cash holding has been taken seriously again. The "After Economic Crisis" environment which full of variables and opportunities has already led many corporate gone bankrupt, mainly due to their failure in manage the cash holding and rupture of the capital chain. So, the stakeholders have paid more and more attention to cash holdings strategies, they are interested in which strategy is more suitable for the corporate and can increase enterprise value.At present the studies on consequences of cash holding are mostly based on industry factors and corporate governance factors, less involved in the effects of cash holdings in different external environments. And the results of relevant researches are apparent contradiction. Some researches shows that cash holding has positive correlation with enterprise value while some others say there are negative correlation or no significant relationship between cash holding and enterprise value. While in this paper, I take the world economic crisis as the starting point, based on the achievements of previous studies, and select the listed companies in Shanghai and Shenzhen Stock Exchange in China from year2005-2010as research sample to study the relationship between cash holding and enterprise value under different external environment. In the research I’ll use panel data models to analysis the samples been selected and try to use the result to advise the strategy of cash holdings for listed companies.This paper has six parts. The first part is introduction, this part mainly introduced how the problem’s been found, why we need to study the problem, the method and theory this paper will use, the innovation of this paper and propose research framework. The second part is consist of theoretical analysis and research hypothesis. These parts propose. hypotheses on the basis of summarize relevant research results. The third and fourth part is consist of research design and empirical research, and is the main part of the paper. The last part is conclusions and prospects. This part concludes the paper, put forward suggestions and looking into the future of further study.The paper found that,1. When the external environment is stable, companies don’t need too many cash to avoid risk, but the risk that managers divert the holding cash for self-motivation purpose rise and because of the agency costs, company owners cannot monitor manager’s conduct effectively. All that makes the company’s interests lost. In that condition, if the company keep over-cash for long period of time, that will cause the owners to pay attention to the holding cash, so that’s hard for the manager to use the cash freely, and that also inhibit the loss of enterprise value.2. When the external environment is dynamic, due to the increased business risk, precautionary demand for cash increases, at that time the company manager’s primary task is to control risk and keep their eye on keeping the company operation, so the self-motivation cash use has been inhibited, together increase cash holdings of the company is more profitable to a company at that time. Meanwhile, Internal Financing is low-cost and low financial difficulty in unstable external environment, which makes the cash holdings have a catalytic effect on enterprise value; In this environment, if the company holds longer-term cash, it may increase managers’ self-interest motivation, and have bad effect on enterprise value.This study shows that:1. Due to the Agency Cost, company managers’ self-interest motivation have a negative effect on the relationship between cash holding and enterprise value. This requires list companies to maintain effective supervision on company’s cash holding in order to reduce the negative effect.2. According to different relationship between cash holding and enterprise value in different external environment, listed companies can raise the level of cash holdings when facing the dynamic environments, and timely adjust the level according to the needs. But in a more stable external environment, companies need maintaining a low level of cash holding.