State Ownership, Soft-Budget Constraint and Cash Holdings: Evidence from China’s Privatized Firms

48 Pages Posted: 3 Aug 2010 Last revised: 14 Nov 2012

See all articles by William L. Megginson

William L. Megginson

University of Oklahoma

Zuobao Wei

University of Texas at El Paso

Date Written: November 14, 2012

Abstract

We study the relation between state ownership and cash holdings in China’s share-issue privatized firms from 1993 to 2007. We find that the level of cash holdings declines as state ownership increases. This negative relation is attributable to the soft-budget constraint (SBC) inherent in state ownership. The Chinese financial system is dominated by the state-owned banks, an environment very conducive for the SBC effect. We further examine and quantify the effect of state ownership on the value of cash and find that the marginal value of cash declines as state ownership increases. The next RMB added to cash reserves of the average firm is valued at RMB 0.94 by the market. The marginal value of cash in firms with zero state ownership is RMB 0.33 – RMB 0.47 higher than in firms with majority state ownership. The SBC effect exacerbates agency problems inherent in state-controlled enterprises, contributing to the lower value of cash.

Keywords: Privatization, State Ownership, Soft Budget Constraint, Cash Holdings, China

JEL Classification: G32, G34, G38

Suggested Citation

Megginson, William L. and Wei, Zuobao, State Ownership, Soft-Budget Constraint and Cash Holdings: Evidence from China’s Privatized Firms (November 14, 2012). 23rd Australasian Finance and Banking Conference 2010 Paper. Available at SSRN: https://ssrn.com/abstract=1652860 or http://dx.doi.org/10.2139/ssrn.1652860

William L. Megginson

University of Oklahoma ( email )

307 W Brooks, 205A Adams Hall
Norman, OK 73019
United States
(405) 325-2058 (Phone)
(405) 325-1957 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/M/William.L.Megginson-

Zuobao Wei (Contact Author)

University of Texas at El Paso ( email )

500 W. University Ave.
El Paso, TX 79968
United States
915-747-5381 (Phone)
915-747-6282 (Fax)

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