The effect of government quality on corporate cash holdings |
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| Institution: | 1. University of International Business and Economics, China;2. Beijing Foreign Studies University, China;3. Cardiff University, UK;4. Faculty of Business and Economics, University of Hong Kong, Hong Kong;1. Department of Finance, School of Business, Quinnipiac University, Hamden, CT 06518, United States;2. HSBC Business School, Peking University, Shenzhen, China;1. School of Accountancy, Singapore Management University, Singapore;2. Department of Accountancy, College of Business, City University of Hong Kong, Hong Kong Special Administrative Region;3. College of Business, Sun Yat Sen University, Guangzhou, China;1. Istanbul Medeniyet University, Ünalan Mah. Ünalan Sok., D-100 Karayolu Yanyol, 34700, Üsküdar, ?stanbul, Turkey;2. Istanbul Technical University (ITU), Macka 34367, Istanbul, Turkey |
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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. |
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