Abstract
This study investigates the determinants of cash holdings in the period 1999–2009 in China. The sample period covers the time of financial crisis. The focus in this study is on how firm characteristics, especially financial constraints and investment options, are associated with cash holdings. The findings show that:
-
Compared to “normal” times, Chinese firms tend to increase their cash holdings during the financial crisis.
-
In general, the firms with more financial constrains, and with more investment opportunities, tend to hold more cash.
-
Further, the firms with lower leverage, less net working capital (NWC), and lower capital expenditures, are more likely to increase their cash holdings as well. Likewise, those firms tend to save more cash from cash flow.
-
The evidence suggests that Chinese firms are precautious with their cash holdings.
Similar content being viewed by others
References
Almeida, H. Campello, M. and Weisbach, M., 2004. The cash flow sensitivity of cash. Journal of Finance, 59(4), pp.1777–1804.
Bates, T.W. Kahle, K.M. and Stulz, R.M., 2009. Why do U.S. firms hold so much more cash than they used to? Journal of Finance, 64(5), pp.1985–2021.
Boileau, M. and Moyen, N., 2010. Corporate cash savings: Precaution versus liquidity. CIRPEE Working Paper, 09–53. [online] Available at <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1532811> [Accessed 20 June 2011]
Campello, M. Giambona, E. Graham, J.R. and Harvey, C.R., 2011, Liquidity management and corporate investment during a financial crisis. Review of Financial Studies, 24(6), pp.1944–1979.
Campello, M. Graham, J.R. and Harvey, C.R., 2009. The long-term cost of the financial crisis. [online] Available at <http://ssrn.com/abstract=1357806> [Accessed 20 June 2011].
Campello, M. Graham, J.R. and Harvey, C.R., 2010. The real effects of financial constraints: Evidence from a financial crisis. Journal of Financial Economics, 97(3), pp.470–487.
Duchin, R. Ozbas, O. and Sensoy, B.A., 2010. Costly external finance, corporate investment, and the subprime mortgage credit crisis. Journal of Financial Economics, 97(3), pp.418–435.
Faulkender, M. and Wang, R., 2006. Corporate financial policy and the value of cash. Journal of Finance, 61(4), pp.1957–1990.
Feng, X. and Johansson, A.C., 2011. Escaping political extraction: Political participation, institutions, and cash holdings in China. CERC Working Paper, 18.
Gao, P. and Yun, H., 2009. Commercial paper, lines of credit, and the real effects of the financial crisis of 2008: Firm-level evidence from the manufacturing industry. [online] Available at <http://ssrn.com/abstract=1421908> [Accessed 20 June 2011].
Hugonnier, J. Malamud, S. and Morellec, E., 2011. Capital supply uncertainty, cash holdings, and investment. [online] Available at <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1658362> [Accessed 20 June 2011].
Ivashina, V. and Scharfstein, D., 2010a. Bank lending during the financial crisis of 2008. Journal of Financial Economics, 97(3), pp.319–338.
Ivashina, V. and Scharfstein, D., 2010b. Liquidity management in the financial crisis, working paper, Harvard Business School.
Jensen, M., 1986. Agency cost of free cash flow, corporate finance, and takeovers. American Economic Review, 76(2), pp.323–329.
Kahle, K.M. and Stulz, R.M., 2011. Financial policies, investment, and the financial crisis: Impaired credit channel or diminished demand for capital? Fisher College of Business Working Paper, 2011–3. [online] Available at <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1754660> [Accessed 20 June 2011].
Lian, Y. Xu, Y. and Zhou, K. 2011. How and why do firms adjust their cash holdings toward targets? Evidence from China. Frontiers of Business Research in China, forthcoming.
Lins, K. Servaes, H. and Tufano P., 2010. What drives corporate liquidity? An international survey of strategic cash and lines of credit. Journal of Financial Economics, 98(1), pp.160–176.
Opler, T. Pinkowitz, L. Stulz, R. and Williamson, R., 1999. The determinants and implications of corporate cash holdings. Journal of Financial Economics, 52(1), pp.3–46.
White, H., 1980. A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica, 48(4), pp.817–838.
Author information
Authors and Affiliations
Corresponding author
Additional information
This paper is supported by the NSFC (No.71002056) and Social Scientific Research Foundation of Ministry of Education of China (No. 09YJC790269).
Rights and permissions
About this article
Cite this article
Lian, Y., Sepehri, M. & Foley, M. Corporate Cash Holdings and Financial Crisis: An Empirical Study of Chinese Companies. Eurasian Bus Rev 1, 112–124 (2011). https://doi.org/10.14208/BF03353801
Published:
Issue Date:
DOI: https://doi.org/10.14208/BF03353801