The Dynamic Analysis Of Cash Holdings

Why do firms hold cash?This is an arguing question.Previous schoolers analyzed various determinants of firms' cash holdings and developed trade-off theory and pecking order theory to explain firms' cash holdings.Selecting the A-shared listed companies in China from 2005 to 2015 as a research sample,this essay empirically studies the dynamic characteristics of cash holdings and its driving factors.We find that the dynamics of cash holdings is mainly driven by two factors:the first is firms,behaviors of actively adjusting their cash holdings to target levels,the second is firms'financial deficits.The empirical results suggest that the speed of adjustment of cash holdings has the property of asymmetry and nonlinearity and firms' propensity to decrease their cash holdings when facing financial deficit is significantly larger than firms' propensity to increase their cash holdings when facing financial surplus.The test of trade-off theory against pecking order theory also suggests that both dynamic trade-off theory and pecking order theory can partially explain the dynamics of firms' cash holdings but the former has larger explanative power than the latter.Furthermore,we also find that the mechanics behind dynamic trade-off theory and pecking order theory,to some extent,interactively act on firms' cash holdings.The empirical results also suggest that the speed of adjustment of firms having above-target cash holdings with a financial deficit is larger than that of firms having above-target cash holdings with a financial surplus and the speed of adjustment of firms having below-target cash holdings with a financial surplus is larger than that of firms having below-target cash holdings with a financial deficit;that the propensity to increase cash holdings of firms facing financial surplus with below-target cash holdings is larger than that of firms facing financial surplus with above-target cash holdings and the propensity to decrease cash holdings of firms facing financial deficit with above-target cash holdings is larger than that of firms facing financial deficit with below-target cash holdings.By elaborately examining the dynamics of cash holdings,we think that dynamic trade-off theory and pecking order theory should be put into the unified theory of cash policy and the deviations from target cash levels and financial deficits jointly influence the dynamics of cash holdings in some interactive mechanism.