Abstract
Abstract A closer bank-firm relationship is beneficial to corporate development since firms are able to mitigate their financing constraints through direct or indirect means, such as related-party loans or signalling. This results in more firms tending to invest in financial institutions. This paper matches 615 firms investing in nonlisted financial institutions over the period 2007 to 2011 with 615 firms of the closest asset size in the same industry and year but without such investment. We find that investing in financial institutions can be beneficial for firms. It can lower the financing constraints and demand for cash reserves, not only directly (due to the close relationship between holding firms and financial institutions), but also indirectly (due to the influence on financing constraints, which require a higher level of cash holdings). Higher financing constraints will stimulate firms to hold more cash, while investing in financial institutions can enable such firms to reduce their reserves. When we divide the shareholdings further into nonlisted banks and nonlisted, nonbanking institutions, we find that the former does not significantly affect financing constraints and cash holdings, but the latter effectively alleviates firms’ financing constraints and reduces the level of cash. Furthermore, we find that the influence of investing in financial institutions is more evident for NSOEs than SOEs in China.
Highlights
The financial crisis that broke out at the end of 2007 has depressed the world economy, with many firms going bankrupt or finding themselves in distress
The level of cash reserves (CASH) is significantly and positively related to the inverse of the ratio of long term debt to total assets (InvLLEV) and cash dividends per share (DPS), meaning that the higher the financing constraints, the more cash reserves held by the firm
The inverse of free cash flow per share (InvFCF) is significantly and negatively related to the level of cash reserves (CASH), which is contrary to our hypothesis on financing constraints
Summary
The financial crisis that broke out at the end of 2007 has depressed the world economy, with many firms going bankrupt or finding themselves in distress. This paper aims to investigate the influence of holding shares in financial institutions by listed firms on their financing constraints and cash reserves, in order to provide evidence for the reduction in operating costs and the beneficial effect of nongovernmental investment in the financial industry by nonstate-owned firms in China. Compared to state-owned enterprises (SOEs), NSOEs are more restricted in their financing, so the influence of shareholdings in financial institutions is more evident for the latter This shows that encouraging and guiding nongovernmental investment in the financial industry is beneficial for NSOEs. we Shareholdings in Financial Institutions, Financing Constraints, and Cash Reserves find that during the sample period, shareholdings in the financial industry worked for firms in nonmanufacturing industries, in terms of reducing their financing constraints and levels of cash reserves, but the same was not true for manufacturing companies.
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