Speculative Motive for Holding Cash and High-Interest Entrusted Loans

Abstract

We empirically tested the speculative motive for holding cash using high-interest entrusted loans in China as an example of speculative activity. A significant and positive relation exists between high-interest entrusted loans and last period cash holding; supporting the speculative motive for holding cash. In addition, the likelihood of engaging in speculative entrusted loans decreases with the percentage of independent directors and the percentage of stock ownership by institutional investors. On the other hand, Central state-owned enterprises (SOEs) and firms in profitable industry are less likely to speculate with high-interest entrusted loans. Also, firms are more likely to lend high-interest entrusted loans during periods of loose monetary policy. These findings indicate that the speculative motive for holding cash is weakened for firms with stronger corporate governance and better earning ability. Also, monetary policy and the regulatory nature of state-owned enterprise influence the decision of providing high-interest entrusted loans.