The Effects of Government Quality on Corporate Cash Holdings

43 Pages Posted: 10 Dec 2011 Last revised: 19 Jun 2014

See all articles by Deqiu Chen

Deqiu Chen

University of International Business and Economics (UIBE) - Business School

Sifei Li

Beijing Foreign Studies University

Jason Zezhong Xiao

Cardiff Business School, Cardiff University

Hong Zou

The University of Hong Kong - Faculty of Business and Economics

Date Written: June 17, 2014

Abstract

We use China as a laboratory to test the effect of government quality on cash holdings. We build on, and extend, the existing literature on government expropriation and its interaction with firm-level agency problems by proposing a financial constraint mitigation argument. Wefind that firms hold less cash when local government quality is high, which is not consistent with the state expropriation argument, but supports the financial constraint mitigation argument. A good government lowers the investment sensitivity to cash flows and cash sensitivity to cash flows, decreases cash holdings more significantly in private firms, and improves access to bankand trade credit financing. We also test and find support for Stulz’s (2005) model on theinteraction between government and firm agency problems.

Keywords: Cash holding, Government quality, Institutions, Property rights, Twin agency problems, China

JEL Classification: G32, G38

Suggested Citation

Chen, Deqiu and Li, Sifei and Xiao, Jason Zezhong and Zou, Hong, The Effects of Government Quality on Corporate Cash Holdings (June 17, 2014). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1969711 or http://dx.doi.org/10.2139/ssrn.1969711

Deqiu Chen

University of International Business and Economics (UIBE) - Business School ( email )

Beijing
China

Sifei Li

Beijing Foreign Studies University ( email )

No.19 North Xisanhuan Avenue, Haidian District
Beijing, Beijing 100089
China

Jason Zezhong Xiao

Cardiff Business School, Cardiff University ( email )

Aberconway building
Colum Drive
Cardiff, CF10 3EU
United Kingdom

Hong Zou (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Hong Kong

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