Financial Constraints、Investment And The Value Of Cash Holdings

Modigliani and Miller (1958) argue that in a frictionless environment, company can find all value-increasing investment opportunities. That is, investment and growth do not depend on the availability of internal capital.Once capital market imperfections are introduced,capital market frictions increase the cost of outside capital relative to internally generated funds.Consequently, some firms that have attractive growth opportunities invest less than the first-best optimum, leading to lower future growth and reduced operating performance and firm value. One way to mitigate these adverse effects is for firms with high costs of external finance to rely more on internal financial resources:cash flow an cash holdings.In theory,high cash holdings may have two different effects on the value of firm.Under one view,higher cash holdings increase the value of constrained firms because they allow the firms to undertake valuable projects that might otherwise be bypassed.Alternatively,if financial constraints are a byproduct of moral hazard problems,high cash holdings may increase the likelihood of agency problems and empire-building by managers of constrained firms.This paper provide robust evidence that cash holdings are more valuable for financially constrained firms than for unconstrained firms and investigate why this is so.The paper choose relevant data from the firms listed in the Shenzhen and Shanghai stock exchange over the period from 2006 to 2010.We divide the firms into constrained firms and unconstrained firms by firm size,annual payout ratio,the possibility of financial crisis and the development of financial industry,using descriptive statistics, the correlation analysis and multiple linear regression analysis to draw our conclusions.Our results indicate that cash holdings are more valuable for financially constrained firms than for unconstrained firms;the reason why cash are more valuable for financially constrained firms is that high cash holdings allow constrained firms to undertake value-increasing projects that might otherwise be bypassed; the investment efficiency is higher for the small scale enterprises and non-governmental businesses;the investment efficiency is lower for the firms with poor financial condition and the firms that are in the areas of a lower development of financial industry;the investment efficiency is no greater for firms with a lower payout ratio than the firms with a higher payout ratio;the constrained firms that reserve fewer cash holdings has higher non-capital expenditure investment efficiency than the unconstrained firms with lower cash reserve;the constrained firms that reserve higher cash holdings has higher investment efficiency in capital expenditure and non-capital expenditure than the unconstrained firms that have fewer cash holdings.