Compulsory liability insurance and excess cash holdings: Evidence from China

Di Wang, Liangju Guo and Saipeng Xing

International Review of Financial Analysis, 2024, vol. 91, issue C

Abstract: Our study examines how compulsory food safety liability insurance (CFSLI) relates to excess cash holdings. We use the implementation of CFSLI in different regions and at different times in China to identify its causal effects on the trust goods market using the difference-in-differences method. Our findings show that CFSLI significantly reduces excess cash holdings. Our results are robust to additional tests. The mechanisms that lead to this result are the mitigation of the precautionary motive arising from financing constraints and alleviation of the agency problem. Furthermore, we show that CFSLI plays a significant role in reducing excess cash holdings when there is considerable media coverage or a company is located in a region with a high level of marketization.

Keywords: Compulsory food safety liability insurance; Excess cash holdings; Precautionary motive; Agency problem; China (search for similar items in EconPapers)
JEL-codes: G22 G32 G38 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:91:y:2024:i:c:s1057521923005276

DOI: 10.1016/j.irfa.2023.103011

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