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Conference Paper: The effects of government quality on corporate cash holdings

TitleThe effects of government quality on corporate cash holdings
Authors
KeywordsCash holdings
China
Government quality
Institutions
Investor protection
Twin agency problems
Issue Date2012
Citation
The 2012 China International Conference in Finance (CICF 2012), Chongqing, China, 9-12 July 2012. How to Cite?
2012中国金融国际年会, 中国, 重庆, 2012年7月9-12日. How to Cite?
AbstractWhile Stulz (2005) highlights the importance of the state expropriation agency problem and its interaction with the insider agency problem, there is limited research on how state policies shape firm policies. We test the effects of government quality on corporate cash holdings using a unique World Bank survey containing data on local government quality in China. Using single-country data enables us to have a cleaner test of the effects of law enforcement on cash holdings by effectively holding shareholder rights conferred by law constant (shareholder rights are a focus of prior international studies). We hypothesize that on the one hand, a good government refrains from expropriating firms and enables firms to hold more cash. On the other hand, a good government may help relieve financial constraints and enable firms to hold less cash – a new channel that has been neglected by the prior literature. In addition, a good government may indirectly affect cash holdings through limiting insiders’ private consumption of firm resources. We find that firms hold less cash when there is a better local government, and the effect is more pronounced in private firms than in state-owned enterprises (SOEs). Our evidence suggests that the financial constraint relieving argument dominates the expropriation argument in China. Increasing external sources of finance such as bank loans, trade credit, and inward foreign direct investment are among the ways through which local governments help relieve firms’ financial constraints. Our study is also the first to find evidence that supports Stulz’s (2005) argument on the interaction between the twin agency problems.
DescriptionSession - Cash Holding and Financial Constraints
Persistent Identifierhttp://hdl.handle.net/10722/205080

 

DC FieldValueLanguage
dc.contributor.authorChen, Den_US
dc.contributor.authorLi, Sen_US
dc.contributor.authorXiao, Jen_US
dc.contributor.authorZou, Hen_US
dc.date.accessioned2014-09-20T01:24:38Z-
dc.date.available2014-09-20T01:24:38Z-
dc.date.issued2012en_US
dc.identifier.citationThe 2012 China International Conference in Finance (CICF 2012), Chongqing, China, 9-12 July 2012.en_US
dc.identifier.citation2012中国金融国际年会, 中国, 重庆, 2012年7月9-12日.-
dc.identifier.urihttp://hdl.handle.net/10722/205080-
dc.descriptionSession - Cash Holding and Financial Constraints-
dc.description.abstractWhile Stulz (2005) highlights the importance of the state expropriation agency problem and its interaction with the insider agency problem, there is limited research on how state policies shape firm policies. We test the effects of government quality on corporate cash holdings using a unique World Bank survey containing data on local government quality in China. Using single-country data enables us to have a cleaner test of the effects of law enforcement on cash holdings by effectively holding shareholder rights conferred by law constant (shareholder rights are a focus of prior international studies). We hypothesize that on the one hand, a good government refrains from expropriating firms and enables firms to hold more cash. On the other hand, a good government may help relieve financial constraints and enable firms to hold less cash – a new channel that has been neglected by the prior literature. In addition, a good government may indirectly affect cash holdings through limiting insiders’ private consumption of firm resources. We find that firms hold less cash when there is a better local government, and the effect is more pronounced in private firms than in state-owned enterprises (SOEs). Our evidence suggests that the financial constraint relieving argument dominates the expropriation argument in China. Increasing external sources of finance such as bank loans, trade credit, and inward foreign direct investment are among the ways through which local governments help relieve firms’ financial constraints. Our study is also the first to find evidence that supports Stulz’s (2005) argument on the interaction between the twin agency problems.-
dc.languageengen_US
dc.relation.ispartofChina International Conference in Finance, CICF 2012en_US
dc.relation.ispartof2012中国金融国际年会-
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.subjectCash holdings-
dc.subjectChina-
dc.subjectGovernment quality-
dc.subjectInstitutions-
dc.subjectInvestor protection-
dc.subjectTwin agency problems-
dc.titleThe effects of government quality on corporate cash holdingsen_US
dc.typeConference_Paperen_US
dc.identifier.emailZou, H: hongzou@hku.hken_US
dc.identifier.authorityZou, H=rp01800en_US
dc.description.naturepostprint-
dc.identifier.hkuros232939en_US
dc.customcontrol.immutablesml 141015-

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