Determinants of corporate cash holdings : evidence from Hong Kong

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Determinants of corporate cash holdings : evidence from Hong Kong

 

Author: Chung, Soo-fong
Title: Determinants of corporate cash holdings : evidence from Hong Kong
Degree: D.B.A.
Year: 2006
Subject: Hong Kong Polytechnic University -- Dissertations.
Cash flow -- China -- Hong Kong -- Econometric models.
Corpoartions -- China -- Hong Kong -- Finance -- Econometric models.
Liquidity (Economics) -- China -- Hong Kong.
Department: Graduate School of Business
Pages: viii, 98 leaves ; 30 cm.
Language: English
InnoPac Record: http://library.polyu.edu.hk/record=b2145957
URI: http://theses.lib.polyu.edu.hk/handle/200/1403
Abstract: Cash undoubtedly plays a very important role in the daily operation of a company. Cash is needed for funding projects undertaken by the company. How does the company's management determine the level of cash to hold and what factors affect this decision? This study examines the determinants of corporate cash holdings in the context of listed companies on the Hong Kong Stock Exchange which include the blue chip, red chip and H-share companies. Recent studies generated three theoretical frameworks which will be adopted for this study and these are the Free Cash Flow, Trade-Off and Pecking Order theories. The blue chip companies are identified as the strongest and most stable companies listed on the Hong Kong Stock Exchange and operating in the better investor protection environment. The blue chip and China affiliated (red chip and H-share) companies can be said to be operating in two very different investor protection environments. The China affiliated companies trade in the same platform as other locally incorporated Hong Kong listed companies but with their businesses mainly operating in Mainland China where the investor protection environment is still in its infancy. Studies on the East Asian model of shareholding found that higher ownership concentration in Hong Kong companies and hence, the impact of having major shareholding to the level of cash holding is also examined in this study. The first set of regression results for the overall sample data suggest support for the Pecking Order model. Leverage, dividend payout policy, growth opportunities and capital expenditure all have significant relationships with corporate cash holdings. Further tests generated significant results for the blue chip companies only. The red chip companies tend to increase holding in cash as profitability increases. They are, after all, the more privatized and diversified holding companies which may suggest the existence of agency problem. Excess cash could be used unwisely by the managers who may have hidden agendas. The results from the second regression model suggest support for hypothesis 4 which means that investor protection environment does affect corporate cash holdings in companies. Companies with higher major shareholding in the blue chip companies tend to hold more cash. These major shareholders could be institutional investors who may want to safeguard the companies that they have invested in from financial distress and/or bankruptcy. There are, however, no significant results with higher major shareholding for the China affiliated companies. The first contribution of this study is finding significant results that companies operating in a weaker investor protection environment tend to hold more cash especially the more privatized and diversified red chip companies. Second contribution is that companies with higher major shareholding tend to hold more cash. The presence of institutional investors could be a good monitoring force in ensuring shareholders' value is optimized and to minimise excess cash being used for wasteful activities by managers. The third and main contribution of this study is finding significant results of the determinants of corporate cash holdings in the context of listed companies which suggests support for the Pecking Order model.

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