The effect of government quality on corporate cash holdings

Deqiu Chen, Sifei Li, Jason Zezhong Xiao and Hong Zou

Journal of Corporate Finance, 2014, vol. 27, issue C, 384-400

Abstract: 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.

Keywords: Cash holding; Government quality; Property rights; Twin agency problems; China (search for similar items in EconPapers)
JEL-codes: G32 G38 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (66)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:27:y:2014:i:c:p:384-400

DOI: 10.1016/j.jcorpfin.2014.05.008

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