Abstract
A closer bank-firm relationship is beneficial to corporate development since firms are able to mitigate their financing constraints through direct or indirect means, such as related-party loans or signalling. This results in more firms tending to invest in financial institutions. This paper matches 615 firms investing in nonlisted financial institutions over the period 2007 to 2011 with 615 firms of the closest asset size in the same industry and year but without such investment. We find that investing in financial institutions can be beneficial for firms. It can lower the financing constraints and demand for cash reserves, not only directly (due to the close relationship between holding firms and financial institutions), but also indirectly (due to the influence on financing constraints, which require a higher level of cash holdings). Higher financing constraints will stimulate firms to hold more cash, while investing in financial institutions can enable such firms to reduce their reserves. When we divide the shareholdings further into nonlisted banks and nonlisted, nonbanking institutions, we find that the former does not significantly affect financing constraints and cash holdings, but the latter effectively alleviates firms’ financing constraints and reduces the level of cash. Furthermore, we find that the influence of investing in financial institutions is more evident for NSOEs than SOEs in China.
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CLC Codes: F275, F272, F832
1 This paper is sponsored by the National Natural Science Fund (713022023 and 71372047), the Fundamental Research Funds for the Central Universities, Beijing Normal University (2012WYB35), and the Beijing Higher Education Young Elite Program (YETP0298). We would like to thank the two anonymous referees and Professor Wayne W. Yu (Executive Editor) for their valuable comments.
2 PhD, Associate Professor, School of Economics and Business Administration, Beijing Normal University, Haidian District, Beijing, China (100875). Email: zhusong@bnu.edu.cn.
3 PhD, Associate Professor, School of Economics and Management, Tsinghua University, Haidian District, Beijing, China (100084). Email: chengtg@sem.tsinghua.edu.cn.
4 PhD, Assistant Professor, School of Economics, Capital University of Economics and Business, Fengtai District, Beijing, China (100070). Email: duwencui3109@163.com.
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Zhu, S., Chen, G. & Du, W. Shareholdings in Financial Institutions, Financing Constraints, and Cash Reserves1 . China Account Financ Rev 16, 18 (2014). https://doi.org/10.7603/s40570-014-0018-y
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DOI: https://doi.org/10.7603/s40570-014-0018-y