Abstract
This paper takes into consideration the character of China as an emerging market and distinguishes between the ultimate-controller trait of the central government and the local government. This paper conducts the analysis using the corporate governance and financial character perspectives, based on agency theory and financial constraint theory. The findings show that corporate governance is the main reason for values of cash holdings of SOEs are lower than those of private firms. Moreover, values of cash holdings of SOEs controlled by the central government are higher than those of cash holdings of firms controlled by local governments. The difference could be attributed to the observation that central government-controlled SOEs have better governance and investment opportunities compared with the local government-controlled ones. The objectives of this paper are to determine the factors influencing the difference between cash holdings of state-owned enterprises (SOEs) and private firms, and to analyze the influence of governments at different levels on value of cash holdings of SOEs in China. Results of the analysis are expected to aid in understanding of how corporate governance and financial constraint affect value of cash holdings of firms.
Highlights
How to determine the value of liquidity is one of the 10 unsolved problems in finance [1]
Values of cash holdings of SOEs controlled by the central government are higher than those of cash holdings of firms controlled by local governments
Government system is a complex interest group wherein the central government acts as the highest principal and the local governments operate as agents of the central government. Their control of SOEs is not similar [12]. This present study concentrates on the Chinese special institutional background, classifies SOEs according to government ultimate-controller level, and analyzes the difference between values of cash holdings of SOEs controlled by the central government and SOEs controlled by local governments in China
Summary
How to determine the value of liquidity is one of the 10 unsolved problems in finance [1]. Their control of SOEs is not similar [12] This present study concentrates on the Chinese special institutional background, classifies SOEs according to government ultimate-controller level, and analyzes the difference between values of cash holdings of SOEs controlled by the central government and SOEs controlled by local governments in China. Unlike previous studies, this present study does not regard SOEs as being uniform enterprises. This paper takes into consideration the emerging-market characteristic of China, provides evidence that corporate governance affects value of cash holdings of firms, and shows that financial constraint has very minimal influence on value of cash holdings for SOEs compared with private firms.
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