Does Cash Contribute to Value? A Comparison of Constrained and Unconstrained Firms in China and Germany

Wei Zhang (), Henk von Eije () and Wim Westerman ()
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Wei Zhang: University of Groningen, IFM-FEB, Netherlands
Henk von Eije: University of Groningen, Netherlands
Wim Westerman: University of Groningen, Netherlands

Eurasian Journal of Economics and Finance, 2015, vol. 3, issue 4, 22-38

Abstract: A fundamental characteristic of emerging markets is the underdevelopment of legal institutions and financial markets. Therefore, the marginal value of a firm’s cash holdings in emerging countries can be lower than 1, due to high agency costs resulting from poor external corporate governance. However, the marginal value of cash may also be high in emerging markets because the information asymmetry between current and new providers of funds is high, which means that it is difficult to access the (low quality) capital markets. We study for the industrialized countries of China and Germany whether corporate cash holdings contribute to shareholder value in both constrained and unconstrained firms. In contradiction to previous literature on emerging markets, we find that the marginal value of cash is not smaller than 1 in China, so that agency costs do not dominate. We, however, find marginal values of cash lower than 1 for unconstrained firms in both countries, implying that in these firms agency costs of cash holdings exist. For constrained firms we find marginal values significantly larger than 1 in both countries. This indicates difficulties in accessing the financial markets for these firms. These difficulties prove to be larger in China than in Germany for small and service firms, but not for high growth firms.

Keywords: Cash; Marginal Value; Agency Cost; Information Asymmetry; Germany; China (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (2)

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