Monetary Policy, Cash Holdings And Corporate Investment

With the changes of economic condition, the central bank will implementdifferent monetary policy. But what effect is monetary policy adjustments havingon corporate investment, and what kind of role is cash holdings playing in thisprocess. This paper conducted a series of studies on these issues. Based on theverification of the negative correlation relations between monetary policy andcorporate investment, we explored the relationship between monetary policy,cash holdings and corporate investment from the two aspects: the first is themediating effect of cash holdings, that is, monetary policy influences corporateinvestment scale by cash holdings; the second is the moderating effect of cashholdings, that is, with the changes in monetary policy, different cash holdings ofenterprises have different degree of change in the scale of investment.This paper took the financial panel data of listing Corporations as the objectof study from2003to2013, and conducted regression using the corporateinvestment as the dependent variable and the monetary policy as the mainexplanatory variable. The results of the study show that the coefficient ofmonetary policy is negative, and monetary policy and corporate investment havenegative correlation.This paper is divided into two steps to study the mediating effect of cashholdings. Firstly, with reference to the basic model of Almeida (2004), carried onthe regression using the cash holdings as the dependent variable and the monetarypolicy as the main explanatory variable. The results of the study show a negativecorrelation with the cash holdings of monetary policy. Then, the enterprises weregrouped according to the cash holding level. We used Tobin Q model to explorethe effect of cash holdings on the enterprise investment scale. The results of thestudy show that the tightening of monetary policy will make cash holdings cashholdings decrease. Cash holdings will have a "squeeze effect" on corporateinvestment. The enterprise will reduce the scale of investment in order to increasecash holdings.When researched on the moderating effect of cash, with reference to theempirical model of Fazzari et al (1998), we explored the influence degreeof monetary policy on the investments of different cash holding enterprises. Theresearch results show that, when monetary policy is tight, the enterpriseinvestments are reduced, and the decline of investments of the low cash holdingcorporate is steeper than the high cash holding corporate. On the contrary, whenmonetary policy is loose, business investments increase in size, and the increase extent of investments in the low cash holding enterprise is bigger than the highcash holding enterprise.This paper linked the macro policy changes to financial behavior of microenterprise, and promote based on the original research. I hope this researchconclusion, to help enterprises according to their own level of cash holdings andthe monetary policy, the formulation of appropriate and effective investmentstrategy.I hope that this study are helpful to the decision of investment inenterprise and the formulation of monetary policy.