Monetary policy,cash holding and corporate investment: Evidence from China |
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| Institution: | 1. School of Economics and Management, Shihezi University, Shihezi 832003, China;2. Henley Business School, University of Reading, Reading RG6 6UD, UK;3. School of Economics and Business Administration, Chongqing University, Chongqing 400030, China;4. Surrey Business School, University of Surrey, Guildford, Surrey GU2 7XH, UK;1. Collaborative Innovation Center for the Cooperation and Development of Hong Kong, Macao and Mainland China, Sun Yat-Sen University, Guangzhou, Guangdong 510275, China;2. Department of Economics, Western Michigan University, Kalamazoo, MI 49008-5330, United States;3. School of Economics, Zhongnan University of Economics and Law, Wuhan, Hubei 430073, 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. Department of Economics, School of Economics and Management, Tsinghua University, Room 525, Weilun Building, Beijing 100084, China;2. Department of Economics, School of Economics and Management, Tsinghua University, Room 546, Weilun Building, Beijing 100084, China;1. Department of Finance, London School of Economics (LSE), Houghton Street, London WC2A 2AE, United Kingdom;2. CEPR, United Kingdom;3. University of Leicester School of Business, Leicester, LE1 7RH, United Kingdom;1. School of Finance, Research Center of Sci&Tech Finance, Jiangxi University of Finance and Economics, China;2. School of Management, Zhejiang University, 866 Yuhangtang Road, Hangzhou, Zhejiang, 310058, China;3. Lee Kong Chian School of Business, Singapore Management University, Singapore |
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| Abstract: | This paper uses 13,766 firm-year observations between 2003 and 2013 from China to investigate the effects of monetary policy on corporate investment and the mitigating effects of cash holding. We find that tightening monetary policy reduces corporate investment while cash holdings mitigate such adverse effects. The cash mitigating role is especially significant for financially constrained firms, non-state-owned enterprises (non-SOEs) and those firms located in a less developed financial market. Cash holding also improves investment efficiency when monetary policy is tightening and tightening monetary policy enhances the ‘cash-cash flow’ sensitivity. Our empirical evidence calls for a critical evaluation on the monetary policies implemented in China which are less effective for state-owned enterprises. It also calls for a necessity for local government to further develop regional financial markets to protect vulnerable businesses, such as non-SOEs and financially constrained firms, from external shocks in order to maintain their sustainable growth and competitive advantages. |
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