Political uncertainty and cash holdings: Evidence from China

Nianhang Xu, Qinyuan Chen, Yan Xu and Kam C. Chan

Journal of Corporate Finance, 2016, vol. 40, issue C, 276-295

Abstract: We examine the relation between political uncertainty and cash holdings for firms in China. We document that, during the first year of a new city government official's appointment, a firm, on average, holds less cash, which is consistent with the grabbing hand hypothesis of politician. Our results are robust to alternative measures of cash holdings, instrumental variable estimation, sub-samples without firms in four major cities, a matched sample approach, and placebo tests. In addition, our additional analyses suggest that a firm holds significantly less cash if: (a) the newly appointed official is from a different city relative to that from the same city, (b) it faces high political extraction risk, and (c) it has strong twin agency conflicts. Lastly, our extended results suggest that the market value of cash holdings is significantly negative during periods of political uncertainty and firms hide their cash by moving it to related firms via related party transactions.

Keywords: Political uncertainty; Cash holdings; Twin agency problem; China (search for similar items in EconPapers)
JEL-codes: G32 G38 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (132)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:40:y:2016:i:c:p:276-295

DOI: 10.1016/j.jcorpfin.2016.08.007

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