How and Why Do Firms Adjust Their Cash Holdings Toward Targets: Evidence from China

25 Pages Posted: 18 Jan 2010 Last revised: 23 Feb 2010

See all articles by Yujun Lian

Yujun Lian

Sun Yat-sen University

Yan Xu

Curtin University

Kaiguo Zhou

National Sun Yat-sen University

Date Written: January 15, 2010


We examine the dynamic adjustment of cash holdings of publicly traded Chinese firms over the period 1998-2006. The empirical evidences are supportive of the dynamic trade-off theory of cash holdings. Importantly, there is strong evidence to support asymmetric adjustments. That is, the adjustments from above the target are significantly faster than adjustments from below. In addition, adjustment speeds are heterogeneous for firms facing differential adjustment costs. In particular, adjustment speed is negatively related to firm size, but positively related to the deviation from the target. Furthermore, in terms of adjustment method, Chinese listed firms make adjustments to their targets primarily through internal financing, while debt financing and dividend payment play a minimal role. Finally, we find that the precautionary motive arising from financial constraints explains the cash holdings adjustment behaviors of Chinese Listed firms well.

Keywords: Cash holding, Dynamic trade-off theory, Dynamic adjustment

JEL Classification: G32, G34

Suggested Citation

Lian, Yujun and Xu, Yan and Zhou, Kaiguo, How and Why Do Firms Adjust Their Cash Holdings Toward Targets: Evidence from China (January 15, 2010). Available at SSRN: or

Yujun Lian (Contact Author)

Sun Yat-sen University ( email )

135 Xin Gang Xi Road
Guangzhou, Guangdong Province
86-20-84110648 (Phone)


Yan Xu

Curtin University ( email )

GPO Box U1987
Perth, WA WA

Kaiguo Zhou

National Sun Yat-sen University ( email )

70 Lien-hai Rd.
Kaohsiung, 80743

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