A Study On The Relationship Between Idiosyncratic Risks And Cash Holdings

Considerable attention has been devoted to firms' motive of cash holdings in China.Researchers in China examine the motivation and implication of holding cash by finding the relationship between the liquid assets and corporate financial variables,which are financial data,corporation governance and so on.Actually,any single independent variable tells just part of the reason.Only by integrating all the variables in one model,then we could find the true motivation that firms tend to hold cash.Therefore,if we could choose a variable that can reflect the combined effects of the various variables mentioned above,we not only can fully reflect the real uncertainty of the corporation,but also can more accurately underlying the reasons why behavior varies with the amount of liquid assets.Based on what is mentioned above,this article chooses 707 A-share listed companies from 2009 to 2014 in China as the sample.First of all,we use the buffer-stock mathematical model to show the way how the idiosyncratic risk have impacts on cash holdings.For that to be the case,we could test it in our empirical model.Second,CAPM and FF models are used to calculate the idiosyncratic risk of the listed firm that it can be regarded as a substitution for the comprehensive impact of the all the financial variables on the listed firms to measure firm uncertainty.We then present a OLS regression to empirically examine the motive of cash holdings by adding the idiosyncratic risk as a independent variable and the cash as a dependent variable.Meanwhile,considering that we should reflect the research results of this article intuitively,we split the sample into some groups by its actual shareholders and its industries.With theoretical analysis and empirical estimation,we show three conclusions.To be more specific,the precautionary motive theory can explain the manners in which the listed firms' cash holdings are used in China.The relationship between the idiosyncratic risk and cash holding is mainly positive.Second,the idiosyncratic risks faced by state-owned enterprises are relatively small,and they are in line with precautionary motives for cash holdings.Moreover,the effect of state-owned enterprise's idiosyncratic risk on cash holdings is even more incontrovertible.Third,among all industries,the real estate industry has the strongest precautionary motive to hold cash and the internet information industry is the other way around.In a word of the research results,they are of great significance.On one hand,this paper shows theoretically that the government has already made a great progress in capital market legislation work.Also,the risk awareness of enterprises in China has improved a lot On the other hand,this can intuitively reflect the attitudes and methods of cash management for different kind of companies in China by splitting the sample into some groups.At the same time,in order to effectively manage corporate cash holding behavior and protect the investors,the government must further improve the rules of the securites market and lead the guidance of the financial management mechanism of listed companies to optimize the liquid assets held by them.