A Study On The Smoothing Effect Of Cash Holdings On Firms’ Investments And It’s Competitive Effect

Firm’s investment can be divided into physical investment and R&D investmentbased on the differences of the adjustment costs, and both of them can’t be separatedfrom financial support, which mainly comes from internal financing and externalfinancing. However, the volatility of internal financing and external financing willlead firm’s investment to change frequently, and the fluctuation of firm’s investmentwill cause high adjustment costs. Therefore, in order to reduce or even avoid the highadjustment costs, firms have to maintain a stable investment spending. We payattention to the effect that corporate cash holdings have on firm’s investment and itsimpact on firm’s competitive performance in product market when firms are trying tomaintain a stable investment spending.Using the panel data of listed companies in Chinese A share market from1999to2012, we firstly examine whether corporate cash holdings have smoothing effect onfirm’s investment based on dynamic investment model with convex adjustment costsusing system GMM. We further regard this smoothing effect that corporate cashholdings have on firm’s investment as a possible way which cash holdings affectfirm’s competitive performance on product market to study the investment smoothingeffect of cash holdings on firm’s competitive performance on product market usingcompetitive performance model by grouping regression co mparison. At the same time,we introduce the reality of the market conditions, financial constraints, to deeplydiscussed under the condition of different financial constraints, corporate cashholdings have on firm’s investment and its impact on firm’s competitive performancein product market. We find that cash holdings have a significant smoothing effect onfirm’s investment, moreover, when firms being financial constraints, the smoothingeffect is more pronounced. The result also shows that investment smoothing, as animportant way that corporate cash holdings affect firm’s product market, also bringsfirm positive competitive performance: cash holdings have a greater impact on firm’scompetitive performance on product market in firms which keep a high le vel ofinvestment smoothing, also, the positive competitive performance is more pronouncedwhen firms being financial constraints. Further, We also use80listed companies ofhigh-tech industry to examine the effect that cash holdings have on R&D spendingand its impact on firm’s competitive performance in product market. The conclusion we get also had similar to physical investment.Cash holdings is an important part of corporate liquidity. Our findings enrich thetheory of corporate cash holdings, and they reveal an important way that howcorporate cash holdings policy influences firm’s product market competitiveperformance, which provide some theoretical basis and practical guidance for Chineselisted companies to make cash holdings policies and investme nt decisions.