The Effects of Government Quality on Corporate Cash Holdings
43 Pages Posted: 10 Dec 2011 Last revised: 19 Jun 2014
Date Written: June 17, 2014
Abstract
We use China as a laboratory to test the effect of government quality on cash holdings. We build on, and extend, the existing literature on government expropriation and its interaction with firm-level agency problems by proposing a financial constraint mitigation argument. Wefind that firms hold less cash when local government quality is high, which is not consistent with the state expropriation argument, but supports the financial constraint mitigation argument. A good government lowers the investment sensitivity to cash flows and cash sensitivity to cash flows, decreases cash holdings more significantly in private firms, and improves access to bankand trade credit financing. We also test and find support for Stulz’s (2005) model on theinteraction between government and firm agency problems.
Keywords: Cash holding, Government quality, Institutions, Property rights, Twin agency problems, China
JEL Classification: G32, G38
Suggested Citation: Suggested Citation
Do you want regular updates from SSRN on Twitter?
Recommended Papers
-
The Determinants and Implications of Corporate Cash Holdings
By Tim C. Opler, Lee Pinkowitz, ...
-
The Cash Flow Sensitivity of Cash
By Heitor Almeida, Murillo Campello, ...
-
Why Do U.S. Firms Hold so Much More Cash than They Used to?
By Thomas W. Bates, Kathleen M. Kahle, ...
-
Why Do U.S. Firms Hold so Much More Cash than They Used to?
By Thomas W. Bates, Kathleen M. Kahle, ...
-
Bank Lines of Credit in Corporate Finance: An Empirical Analysis
By Amir Sufi
-
Corporate Governance and Firm Cash Holdings
By Jarrad Harford, Sattar Mansi, ...
-
Corporate Financial Policy and the Value of Cash
By Michael W. Faulkender and Rong Wang
-
Is Cash Negative Debt? A Hedging Perspective on Corporate Financial Policies
By Heitor Almeida, Viral V. Acharya, ...