The effect of government quality on corporate cash holdings

By Deqiu Chen, Sifei Li, Jason Zezhong Xiao, H. Zou. 2014

165 citations recorded by the source corpus.

We use China as a laboratory to test the effect of government quality on cash holdings. We build on, and extend, the existing literature on government expropriation and its interaction with firm-level agency problems by proposing a financial constraint mitigation argument. We find that firms hold less cash when local government quality is high, which is not consistent with the state expropriation argument, but supports the financial constraint mitigation argument. A good government lowers the investment sensitivity to cash flows and cash sensitivity to cash flows, decreases cash holdings more significantly in private firms, and improves access to bank and trade credit financing. We also test and find support for Stulz's (2005) model on the interaction between government and firm agency problems.

Subfields: Accounting

View Paper: https://www.semanticscholar.org/paper/8a1baa2f59044598c84d1b40acf2e222b8395f5d

Citations in the corpus

• Corporate cash holdings: Causes and consequences (2015, unknown): “Using World Bank data on the local government quality of 120 Chinese cities, Chen et al. (2014) find that when local government is of high quality, firms hold less cash for precautionary reasons.”
• Political Institutions and Bank Risk-Taking Behavior (2015, unknown): “For example, recent studies find that firms take higher investment risks (Boubakri et al. 2013) and borrow more bank loans (Chen et al. 2014) when operating in regions with better political institutions.”