Labor Cost Shock And Corporate Cash Holdings

Cash holding is an important management decision of the company.In recent years,the cash holding level of listed companies in various regions of the world has been continuously increased,and how to explain the influencing factors of cash holding has become a key issue in practice and academia.Keynes’ s money demand theory points out that the main motives for holding cash can be divided into transactional motives,precautionary motives and speculative motives.The existing literatures have investigated the transactional motivation and speculative motivation of cash holding,but paid less attention to the precautionary motivation of cash holding.This is because it is difficult for companies to separate the precautionary motivation of cash holding in normal business conditions,so they can’t overcome the possible endogenous problems.Based on this,this paper exploits the exogenous impact of the promulgation of the Social Insurance Law(SIL)on the corporate labor cost,and studies how the exogenous strengthening of precautionary motivation affects the corporate cash holding,which has important theoretical significance and practical value.The promulgation of SIL is expected to improve the company’s cash holdings.The logic lies in: the promulgation of SIL improves the corporate social insurance payment level,which makes the labor cost rise.Because of the wage stickiness,the company can’t completely pass on the rising labor cost to employees,which leads to the decrease of the company’s operating flexibility,the increase of operating risks and even financial difficulties.The company raises its cash holdings for precautionary actions.This paper takes A-share listed companies in China’s capital market from 2007 to 2019 as research samples,and constructs a quasi-natural experimental situation with the help of the promulgation of SIL.The test results using difference-in-differences method show that:(1)The promulgation of SIL increases the cash holdings of companies by about 6.72%;(2)The decline of business flexibility,the rise of business risks and the aggravation of the possibility of financial difficulties are important channels for the promulgation of SIL to improve the corporate cash holdings;(3)For companies with low social insurance contributions,small cost increase,large financing constraints and non-state-owned property rights,the promulgation of the SIL has led to an increase in cash holdings;(4)The promulgation of SIL leads to the increase of corporate cash holdings,and finally improves the value effect of cash holdings;(5)The promotion effect of the promulgation of SIL on the cash holding level of companies depends on the improvement of regional law enforcement efficiency.The main contributions of this paper are as follows: First,it enriches the research results of labor costs and corporate cash holdings,and verifies the causal effects of rising labor costs and corporate cash holdings.Second,it provides empirical evidence for the economic effect of the promulgation of SIL from the perspective of corporate cash holdings,which has certain enlightenment significance for understanding how macro-policies affect the behavior of microeconomic subjects.Third,the research conclusions can provide reference for relevant legal departments to improve law enforcement efficiency,listed companies to optimize cash management,and investors to enhance their investment strategy ability.