Human Resource Quality and Value of Cash Holdings in Chinese Listed Firms

Cash is a strategically valuable asset for corporate financial sustainability. Cash holdings may create value when external financing is expensive, or undermine corporate value due to agency problems. An efficient use of cash holdings will lead to higher value of cash holdings. In this paper, we investigate the effects of human resource quality on corporate value of cash holdings. Benefited from the unique disclosure of employee education structure in the annual reports of Chinese listed firms, we measure the human resource quality of a company with its weighted average of employee education degrees. The value of cash holdings are examined based on the sensitivity of the change in firm values to the change in cash holdings of a company. We posit that higher level of human resource quality or better educated employees may contribute to corporate governance and internal controls and help to improve the value of corporate cash holdings. We test our hypothesis based on a large sample of Chinese listed A-share firms in 2007–2016 and provide strong evidence that the firm level human resource quality is positively associated with the value of corporate cash holdings. The findings cannot be explained by the effects of management education and are robust to alternative measures of human resource quality and alternative model designs. To alleviate the endogeneity concerns, we adopt a two-stage instrumental variable methodology by including two policy-based exogenous instruments: the number of universities supported by the Chinese government’s “211 project” and the province-year minimum salary levels in the province where a firm headquartered. In addition, we find that the positive effect of human resource quality on the value of cash holdings mainly exists for the non-state-owned-enterprises (non-SOEs) and is more significant for companies operating in industries with more market competition. The results suggest that human resource quality is particularly effective and beneficial for firms operating with strong profit orientation and high market competition. This study add both to the VCH literature and the human resource quality literature by examining the relationship between human resource quality and the value of cash holdings, and reveals the practical importance of human resource quality to corporate cash management efficiency, especially for companies operating in the developing areas.