Abstract
In this paper, we investigate the impact of government control on investors’ valuation of cash held by listed firms in China. We find strong and robust evidence that government control leads to a lower value of cash. Further evidence suggests that this negative impact is associated with significant agency costs of political expropriation rather than low financial constraints of the soft-budget effect. Moreover, our extended analyses reveal that the negative impact of government control on the value of cash depends on regional institutional development. In particular, in regions with high institutional development, government control reduces the value of cash, while in areas that are less developed, this negative impact is attenuated to some extent. Overall, our findings shed new light and add a further dimension to the literature, broadening our understanding of the impact of government intervention on the listed firms under its control.
Highlights
Despite the large wave of privatization that started in the United Kingdom in the 1980s and spread across the globe during the 1990s, government control over listed firms is still pervasive, especially in the emerging markets in general and the Chinese market in particular (Boubakri et al 2018)
We investigate the relationship between government control and the value of cash held by firms
Using a large panel of listed firms in China during the period 2003–2015, we find consistent evidence that government control results in a lower value of cash held by firms
Summary
Despite the large wave of privatization that started in the United Kingdom in the 1980s and spread across the globe during the 1990s, government control over listed firms is still pervasive, especially in the emerging markets in general and the Chinese market in particular (Boubakri et al 2018). This paper is related to the study of Megginson et al (2014), who examine the impact of state ownership on the level, as well as the value, of cash for listed firms in China. Relationship that we document by demonstrating that the value-destroying effect is mainly due to the agency costs of political expropriation associated with their socio-economic objectives This is consistent with recent evidence that government ownership does not necessarily decrease the cost of capital or enhance financing ability (Ben-Nasr et al 2012; Firth et al 2012; Borisova et al 2015; Jaslowitzer et al 2016). Our paper adds to the literature relating to the institutional quality on firms’ financing decisions by providing evidence of their conditional effect on the relationship between government control and the value of cash.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
