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The effect of government quality on corporate cash holdings

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  • Chen, Deqiu
  • Li, Sifei
  • Xiao, Jason Zezhong
  • Zou, Hong

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. We find 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 bank and trade credit financing. We also test and find support for Stulz's (2005) model on the interaction between government and firm agency problems.

Suggested Citation

  • Chen, Deqiu & Li, Sifei & Xiao, Jason Zezhong & Zou, Hong, 2014. "The effect of government quality on corporate cash holdings," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 384-400.
    • Handle: RePEc:eee:corfin:v:27:y:2014:i:c:p:384-400
    DOI: 10.1016/j.jcorpfin.2014.05.008
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    More about this item

    Keywords

    Cash holding; Government quality; Property rights; Twin agency problems; China;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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