Empirical Research On Operating Shortfall, Cash Holdings And The Value Of Cash Holdings

Cash is an important economic resource in the company's business activities, it is not only able to meet the company's daily needs such as pay wages, purchase raw materials, pay interests, but also able to produce a crucial role on the company's investment and financing decisions, dividend payout policy and financial decision-making. The research of cash holdings start earlier in western countries, and a large number of mature theories have been produced. They also do a lot of empirical research on these theories in-depth verification. In recent years, Chinese scholars have gradually carried out the study of cash holdings, but they focus on the determinants of cash holdings, the economic consequences of cash holdings and the improvement of optimal cash holdings models. Seldom have scholars pay attention to the role of operating shortfall on the company's cash holdings.This paper takes precautionary motive of cash holdings as a starting point and add 95 percentile operating shortfall in order to study the relationship among operating shortfall, cash holdings and the value of cash holdings. In empirical terms, this paper selected the panel data in Shanghai and Shenzhen A-share listed companies from 1996 to 2011. First, we use cash holdings of listed companies as the dependent variable, and use financial variables and corporate governance variables as independent variables to analyze the relationship between operating shortfall and cash holdings based on the model proposed by Opler et al(1999). Then we divided the original sample into two sub-samples according to dichotomy in order to analyze the role of tangible assets on corporate cash holdings. Finally, we explored the relationship between operating shortfall and the value of cash holdings according to the excess return model proposed by Faulkender et al(2006). And we also estimated the cash value of full sample and the cash value of sub-samples which from different levels of financial constraints.The results reveal that operating shortfall is an important determinant of cash holdings. Operating shortfall holds a significant positive correlation with cash holdings. The higher the proportion between tangible assets and total assets, the less cash will be held by the company. The relationship between operating shortfall and cash holdings would be diluted if the company's tangible assets increased. When using the company size as standard financing constraints, the value of the cash held by financial constraint companies is higher. Compared with non-financial constraint companies, operating shortfall has a stronger influence on financial constraint companies.