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The effect of government quality on corporate cash holdings

Chen, Deqiu, Li, Sifei, Xiao, Jason Zezhong and Zou, Hong 2014. The effect of government quality on corporate cash holdings. Journal of Corporate Finance 27 , pp. 384-400. 10.1016/j.jcorpfin.2014.05.008

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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.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > HF Commerce
J Political Science > JF Political institutions (General)
Uncontrolled Keywords: Cash holding; Government quality; Property rights; Twin agency problems; China.
Additional Information: This journal has an embargo period of 36 months (https://www.elsevier.com/journals/journal-of-corporate-finance/0929-1199/open-access-options).
Publisher: Elsevier
ISSN: 0929-1199
Date of First Compliant Deposit: 10 June 2016
Date of Acceptance: 20 May 2014
Last Modified: 11 Jul 2017 20:07
URI: http://orca.cf.ac.uk/id/eprint/60174

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