Clan culture and corporate cash holdings: Are private companies supported by informal institutions?

Abstract

In this paper, we empirically examine whether clan culture in China, an extant informal institution established 2000 years ago, affects corporate cash holdings. We use city-level pedigree density as a proxy for clan culture and find that private firms deeply entrenched in clan culture are less likely to hold cash. Our results hold after a series of robustness tests, including instrumental variable regression, alternative measures, and controlling for other influencing factors. Mechanism tests demonstrate that in places with strong clan culture, the cash holdings of private firms are less sensitive to the volatility of operating cash flow, and those non-state-owned enterprises are more likely to obtain alternative financing sources and less likely to carry out high-risk activities. Cross-sectional analyses show that the negative relationship between clan culture and corporate cash holdings is more prominent for firms located in areas with lower marketization or worse economic development. Furthermore, under the shock of the COVID-19 pandemic, firms with strong clan culture enjoy faster growth in trade credit rather than in interest-bearing liabilities. Overall, our findings provide evidence for the existence of sociocultural determinants of corporate cash holding decisions, as they demonstrate that clan culture secures corporate operations and thus reduces the precautionary motives for holding cash.