Amsterdam Business School
Influence of Institutional Investor upon Public Companies'
Cash Holding
Name: Zezhi Zhang
Student number: 11089342 Thesis supervisor: Dr. A. Sikalidis Date: 20 June 2016
Word count: 12495
MSc Accountancy & Control, variant Control
Statement of Originality
This document is written by Zezhi Zhang who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Abstract
Institution is develop rapidly in China nowadays. Prior researches have proved that institutional investors would have influence on corporate governance while cash holdings is always an indicator for firm’s management quality. This paper examine the influence institutional investors on corporate cash holding, finding that share hold by institutional investors would reduce cash hold. It can be infer that share hold by institutional investor would improve corporate governance.
Content
1. Introduction ... 5
2. Literature Reviews ... 8
2.1 Institutional investor ... 8
2.1.1 Classification of institutional investor ... 9
2.1.2 Institutional investors and corporate governance ... 10
2.2 Cash holding ... 11
2.2.1 Cash holding policy relate to corporate governance ... 12
2.2.2 Cash holding policy related to financing and operation ... 13
2.3 Institutional investors and cash holding ... 14
3. Hypotheses Development ... 16
3.1 Overall Institutional ownership and cash holding ... 16
3.2 Heterogeneity of institutional investors and cash holding... 17
4. Data description ... 21
4.1 Data resource and selection ... 21
4.2 Variables design ... 22
4.2.1 Dependent variable definition ... 22
4.2.2 Independent variable definition ... 22
4.2.3 Control variable definition ... 22
5. Regression Analysis ... 26
5.1 Model design ... 26
5.2 Descriptive Statistics ... 26
5.2.1 Descriptive Statistics on Corporate Cash Holding ... 26
5.2.2 Descriptive Statistics on Corporate on institutional investor ... 28
5.2.3 Descriptive Statistics on control variable ... 32
6. Regression Analysis ... 34
6.1 Empirical Analysis on Hypotheses 1 ... 34
6.2 Empirical Analysis on Hypotheses 2 ... 37
6.3 Conclusion on regression analysis ... 42
7. Conclusions ... 42
1. Introduction
Institution, as a main component of investor, is developing rapidly in Chinese capital market and has become an effective force that cannot be ignored. Depending on its powerful capital advantage and social network advantage, institutional investor can easily group up large amount of social capital to purchase securities, real property, and other investment assets or originate loans. And with the help of its professional team of analysts, institutions can always make safe investment and right decisions, which lower the risk of the capital. Finally, institutions can easily get access to a host of corporate and market data that reduce the effect of information asymmetry, which make them a better anticipation on the investment and easier to influence corporate performance and governance. So because of the advantages and position institutions own in capital market, institutions as an investor would surely have some impact on enterprises, especially for those they have invested. The main direction of this paper is to find out how influence institutional investors would have on enterprises, especially on corporate governance.
The first question need to be clarified is what roles institutional investors have played in capital market. Based on their characteristics, prior researchers have identified institutional investors into different classifications. Brickley (1988) defined institutions into three categories (pressure-sensitive institutions, pressure-resistant institutions and pressure indeterminate institutions) based upon their susceptibility to management influence. Pressure-sensitive institutions, represented as insurance companies and banks, have current or potential business relations or interest conflicts with the invested and have less incentive to take part in corporate managements. Pressure-resistant institutions, represented as pension funds and mutual fund, have less interest conflicts with the companies and are more willing to supervise corporate management to protect their own value. Pressure indeterminate institutions perform
in a more mitigated way compared to the other two. Different from Brickley, Bushee (1998) studies institutional investor from investment horizon perspective and classify institutional investor as transient or long-term investors. He finds that long-term investors (including both dedicated and quasi-indexers) make highly concentrated investments, have low turnover, and exhibit little trading sensitivity to current earnings. Transient institutional investors, on the other hand, exhibit high portfolio turnover, extensive use of earnings momentum trading strategies, and relatively high portfolio diversification.
But how will institutional investors influence on corporate governance? The answer remain controversial. There are three main discussions toward the effect that institutions have on corporate governance, effective supervision hypothesis, negative supervision hypothesis and ineffective supervision hypothesis. Effective supervision hypothesis conclude that institutions would mitigate agency problems, improve corporate governance and maximum shareholder value by monitoring, disciplining and influencing corporate managers. Shleifer and Vishny (1986) note that Institutional investors who own large block of share of a firm would mitigate the free-rider problem created by stock diversification and enhance internal oversight mechanism. Qiu (2005) proved that involvement of pension can mitigate the agency problem and subsequently improve firms’ performance. McConnell and Servaes (1990) find that the percent of institutional investor ownership is positively related to a firm’s Tobin’s q which is relate to firm value. Wang K (2005)’s study concluded that institutional investors could efficiently reduce the extent of capital occupation. Negative supervision hypothesis declare that institution will intervene decision making, impede management and as a result reduce firms’ performance. Mizuno (2010) point out that the involvement of institutional investor will negatively influence public firm. Instead of improving corporate governance, the involvement of institutional investors is to acquire financial data of the firm. Ineffective supervision hypothesis infer that institutional investors can hardly influence a firm’s management. Agrawal (1996)’s study found no significant relationship between institutional investor ownership and Tobin’s q which is relate to firm value.
Cash holding policy relate to corporate operation, investment and financing decisions making, is an important indicator of corporate management. Prior researches have revealed that inefficient corporate governance would lead to more cash holding. Jensen et al. (1976) argue that managers prefer to hoard excess cash to pursue their own interests. And resource misappropriate always happen in a low level of owner-manager ownership. Qi et al. (2012) examined the effect of corporate governance on corporate cash holdings in the context of the split share structure reform commenced in 2005 in China and found firms with weaker governance have a greater reduction in cash holding compared to those with better corporate governance. Yuanto (2010) find that managements of firm with a pyramidal ownership structure and less effective boards are less likely to distribute excess cash to shareholders. So less effective and efficient corporate management lead to more agency problem and would create incentive for management to hoard more cash.
Prior researches mainly focus on the influence institutional investors on corporate governance and the influence corporate governance on corporate cash holding, but so far, few research study the direct impact institutional investors on cash holding policies. In this paper, I conduct an empirical study based on 2464 selected samples listed on the Shanghai and Shenzhen stock exchanges over the period 2011 to 2013, examining the relationship between share hold of institutional investors and corporate cash holding. Institutions in China is now developing rapidly and grow as a main force influence the capital market, so study the impact institutional investor have on corporate governance (in this paper, cash holding policies) would be meaningful.
My analysis reveals that institutional investors play an important role in influencing corporate governance, especially cash holding policies. Empirical evidence is provided to prove that share hold by institutional investors would significantly drive enterprises to efficiently spend the excess cash. More share hold by institutional investors would lead to less cash holding. In addition, both pressure sensitive and pressure resistant institutional investors would reduce enterprise cash hold.
My study contribute to the literate on the influence institutional investors have on corporate cash holding on several grounds. First, I expand prior researches which
analysis the influence institutional investors on corporate governance by investigating the relationship share hold of institutional investors and corporate cash hold which is a more detailed indicator for corporate governance. Second, I raise different results against the researches with the similar analysis. Pu (2013) finds that share hold by institutional investors can hardly influence corporate cash hold. But according to my research, institutional investors as a shareholder could be a qualified supervisors and drive management to efficiently spend the money and reduce cash holding. Wu (2014) argue that negative institutional investors (mainly pressure sensitive institutional investors) would have less incentive to supervise corporate management and thus increase corporate cash hold. This is contrary to my result as the regression indicate that the involvement of pressure sensitive investors would also reduce cash hold. In addition, I further investigate the influence of different kinds of pressure sensitive institutional investors and found that all of them, except Bank, tend to reduce corporate cash hold and which is beyond expectation. It can be infer that institutional investors including pressure sensitive investors gradually realize their positions and social responsibility in capital market and start to earn a position in corporate governance to protect shareholders’ value.
The rest of the paper is organized as follows. Section 2 reviews the relevant theory. Section 3 construct my hypotheses of this paper. Section 4 describe the data collection. Section 5 conduct the regression analysis and presents the empirical results. Finally, Section 6 is the main conclusions.
2. Literature Reviews
2.1 Institutional investor
Institutional investor is a term for entities which pool money to purchase securities, real property, and other investment assets or originate loans (Wikipedia). Institutional investor is the biggest component of the so-called "smart money" group,
which is cash invested or wagered by those considered to be experienced, well-informed, "in-the-know" or all three (Investopedia). Chen (2010) defined institution investors as organizations that invest in large block of securities transactions, such as banks, insurance companies, pensions, hedge funds, investment advisors, endowments, and mutual funds. Based on Chen (2010)’s definition, institutional investor in this paper would be defined as organization that using private capital or pooling constituents' investments to invest in securities transactions, mainly include securities investment fund, pensions, securities firm, social security fund, insurance companies, Qualified Foreign Institutional Investors (QFII) etc. Nowadays, institutional investor is developing rapidly and has become an important factor in evaluating the corporate governance.
2.1.1 Classification of institutional investor
Based on the characteristics, institutional investors can be defined into several classifications. Brickley (1988) placed institutions in three mutually exclusive categories based upon their susceptibility to management influence: pressure-sensitive institutions, pressure-resistant institutions and pressure indeterminate institutions. Pressure-sensitive institutions, such as insurance companies and banks, have current or potential business relations with corporates that create potential conflicts and interest and have less incentives to monitor corporate managements. Pressure-resistant institutions, such as pension funds and mutual fund, have less interest conflicts with the companies so are more willing to be involved in corporate management. Bushee (1998) studies the investment horizon of institutional investors by empirically classifying institutional investor as transient or long-term based on their past trading behaviors. He finds that long-term investors (including both dedicated and quasi-indexers) make highly concentrated investments, have low turnover, and exhibit little trading sensitivity to current earnings. Transient institutional investors, on the other hand, exhibit high portfolio turnover, extensive use of earnings momentum trading strategies, and relatively high portfolio diversification.
2.1.2 Institutional investors and corporate governance
How institutional investors could influence corporate governance is still controversial. There are three main discussions toward the effect that institutions have on corporate governance, effective supervision hypothesis, negative supervision hypothesis and ineffective supervision hypothesis. Effective supervision hypothesis conclude that institutions could have positive impact on corporate governance. By direct monitoring, disciplining and influencing of corporate managers, institutional investors will help to mitigate agency problems and thus, increase firm value and shareholders’ wealth. Shleifer and Vishny (1986) note that compared to board of directors, large shareholders may have larger incentive to monitor the governance as it relate much more to their wealth than members of board of directors. Institutional investors owing large block of share of a firm would mitigate the free-rider problem created by stock diversification and enhance internal oversight mechanism. Qiu (2005) studied how pension effect on corporate governance and found that involvement of pension can mitigate the agency problem and subsequently improve firms’ performance. McConnell and Servaes (1990) find that the percent of institutional investor ownership is positively related to a firm’s Tobin’s q which is relate to firm value. Wang K (2005)’s study concluded that institutional investors could efficiently reduce the extent of capital occupation. Wang B (2011) found that institutions have joined in management and became part of governance mechanism. Institutional investors act as a supervisor in corporate management. The empirical results of Li J (2011) indicate that institutional investors would improve firms’ capital structure. Effective supervision hypothesis could be supported by these researchers’ arguments.
Negative supervision hypothesis point out that institution will intervene decision making, impede management and as a result reduce firms’ performance. Mizuno (2010) note that the involvement of institutional investor will negatively influence public firm. Institutional investors are not indeed join in the management but instead, just to acquire financial data of the firm.
influence a firm’s management. Agrawal (1996)’s study found no significant relationship between institutional investor ownership and Tobin’s q which is relate to firm value.
Although the impact institutions on corporate governance is still unclear, most of the researches have come to an agreement: Heterogeneity of institutional investors will make it influence differently on corporate management. Bushee (2000) found high levels of transient institutional investor ownership are associated with firms with high future stock return volatility which related to higher risk. But with the involvement of significant ownership of quasi-indexer, the stock return volatility would be offset. Cornett (2007) studied the relationship between heterogeneity of institutional investors and ROA of the firms and found that ownership of pressure-insensitive institutions is positively related to ROA while pressure-sensitive institutions have less significant relationship with ROA. This finding indicated that pressure-insensitive institutions play a role in corporate governance. Similarly, Almazan et al. (2005) show that greater share ownership by pressure-insensitive investors is associated with greater discipline on executive compensation. Chen et al. (2005) find that pressure insensitive ownership is associated with better acquisition decisions. Fan H (2009) pointed out that social security fund is negatively related to firm value while fund company help to increase firm value. Lu Y (2012) studied corporate violation based on 1729 Chinese listed firms over the period of 2001-2009 and found that institutional shareholding is positively related to fraud detection and institutions would significantly reduce the violation propensity. Firms whose share held by pension, social securities fund are less likely to commit violations compared to firms with high level ownership of securities firm.
2.2 Cash holding
Cash holding policy is an important indicator of corporate management, not just for daily operational needs, but also relate to Investment and financing Decisions making. Less cash holding would have impact on corporate running but too much cash
remain unused would increase the opportunity cost. Too much cash holding would also increase the probability of capital occupation by management. So firms should trade off their cash holding policy to maximize firm value. Generally, when marginal revenue of cash equals to marginal cost of cash hold, firms reach its optimal cash holding amount. Prior researches have studied the determinants of cash holdings and analysis mainly from two directions: corporate governance perspective and finance and operation perspective.
2.2.1 Cash holding policy relate to corporate governance
Corporate management would influence cash holding policy. Prior researches were conducted mainly around shareholding of management, characteristics of board and equity concentration to study how management policies can influence cash holding. Jensen et al. (1976) argue the agency conflicts exist between shareholders and managers. Managers can pursue their own interests at the expense of shareholders and cash serves the interests of managers more than those of shareholders in this respect. In a low level of owner-manager ownership, manager would be more likely to misappropriate resource to maximum his own utility. While in a high level of owner-manager ownership, manager is less likely to consume perk with greater ownership (i.e. the incentive alignment effect). Ozkan et al. (2004)’s study reveals that managerial ownership plays an important role in determining corporate cash holdings in the UK. The research provide empirical evidence toward relationship between managerial ownership and cash holdings is non-monotonic. When managerial ownership is lower than 24% or larger than 64%, cash holding decrease along with the increase of managerial ownership. When managerial ownership is between 24% and 64%, cash holding reveals a positive relationship with the managerial ownership. Kusnadi (2011) concluded that board size is significantly positive relate to firm’s cash holding. As larger board size would lead to lower management efficiency and shareholders are less effective to ask for dividend of excess cash, firm would tend to hoard more cash. This also indicated that efficient
management would lead to efficient use of cash. Amy Dittmar et al. (2007) note that show that governance has a substantial impact on value through its impact on cash: $1.00 of cash in a poorly governed firm is valued at only $0.42 to $0.88 while cash value in good governance is approximately double. Qi et al. (2012) examined the effect of corporate governance on corporate cash holdings in the context of the split share structure reform commenced in 2005 in China. The research found firms with weaker governance have a greater reduction in cash holding compared to those with better corporate governance. Yuanto (2010) study the relationships between corporate management mechanisms and firms’ cash holdings in Singapore and Malaysia using the board attributes and measures of ownership concentration to measure the quality of a firm's internal governance. He found that managements of firm with a pyramidal ownership structure and less effective boards are less likely to distribute excess cash to shareholders which is usually the minority that have no means to supervise the company effectively. So less effective and efficient corporate management lead to more agency problem and would create incentive for management to hoard more cash. The researches mentioned above support to the argument that efficient corporate governance lead to less cash holding. However, Harford et al. (2008) revealed a contrary conclusion. The research pointed out that management in firms with less effective and efficient governance tend to spend their cash quickly on acquisitions and capital expenditures. As a result, they hold relatively less cash than those with stronger governance. This finding consist with the spending hypothesis.
2.2.2 Cash holding policy related to financing and operation
Prior researches on how financing and operational factors influence are mainly focus on company growth, corporate cash flow, dividend payment, working capital, capital expenditures and lever. Kim et al. (1998) conducted empirical study on a sample of US companies to analysis the factors of cash holdings. They noted that firms bearing high external financing cost, having more volatile earnings, and those firms with relatively lower returns on assets hold significantly larger liquid assets. Similarly, Opler
et al. (1999) studied the determinants on the sample of American public firms. The research provide evidence that firms with better growth potential and opportunities would prefer to hoard lager amount of cash. Firm size and credit rating are negative relate to cash holding, which means that small firm or firm with risky cash flow would tend to hold more cash. Pinkowitz and Williamson (2001) examined the how bank power effect cash holdings of firms from the United States, Germany, and Japan. They found that high power of banks in Japan associated with the lack of other monitor forces from effective non-bank block holders or an active market for corporate control lead to higher levels of cash holding. Bank encourage the firm to keep more cash balance for extract rents from firms or to lower their monitoring costs. However, contrary to the result of Pinkowitz and Williamson (2001), Ferreira et al. (2004) find bank debt is negative relate to cash holdings, with the explanation that “banks are in a better position to ascertain the firm’s credit quality and to monitor and control the firm financial policies, cutting down the asymmetry and agency problems usually associated to other kinds of debt, which result in higher indirect financing costs and external financing constraints”. In addition, they suggest that investment opportunity set and cash flow are positively associate with cash flow while the growing of firm size and leverage will reduce the cash balance. Wu H (2012) conclude that liquid asset substitutes, growth opportunities, leverage and cash flow would influence cash balance while influence of firm size, growth stage of firm and dividend payments are less significant. Xin et al. (2006) found that firm size and leverage is negative relate to public firm cash holding while asset turnover, cash flow, growth opportunities and dividend payments would positively influence the cash holding.
2.3 Institutional investors and cash holding
Based on the narrative above, we can see that institutions could have influence on corporate governance and corporate governance is a determinant of corporate cash holding. Generally, institutional investors have join in corporate governance by two way. One talking an active role in voting and management process, such institutions
tend to be those with less business relations with corporates and would keep the investment for a long period. The other is relatively less incentive and effective to join in corporate governance and tend to “vote with feet”, which means such investors would sell their stock in the case of policy disagreements.
Researches examine the relationship between institutions ownership and cash holding are conducted base on various samples and background. Eckbo (1994) found that institutional investors tend to make firms divide the excess cash flow to reduce the agency cost and thus ownership of institution is negative associate with public firm cash balance. Qi et al. (2005) studied 15832 publicly traded Japanese firms in the 1989 – 2000 period and found a negative relation between ownership of institution and cash holding. Tsung et al. (2012) conducted an empirical study on listed firm in Taiwan during the period 1997-2009 and point out that institutional ownership is negatively relate to cash holding but such relationship is less robust and significant. Harford (2008) examined the influence corporate governance on cash holding among 11645 samples and found that growth of shareholding of institutions will increase corporate cash holding. Luo L (2010) studied among 175 UK public firms in 1999-2000 and noted that improvement of corporate governance would prevent management from hoarding too much cash, improvement of governance structure will better reduce agency cost and monitor management. Han (2010) pointed out that high level of institutional ownership lead to low level of cash holding after studying 574 manufacturing companies in the period of 2005-2008 in China. Pu (2013) examined relation between ownership of overall institutional investors, heterogeneity of institutional investors and corporate cash holding taking 1362 public firms in Chinese A share on the period 2008-2011 as sample. She found that overall ownership of institutions is positive relate to cash holding. Pressure-resistant institutional investors would increase cash balance. For state owned enterprises, both pressure-sensitive and pressure-resistant institutions make corporate cash balance go up.
3. Hypotheses Development
3.1
Overall Institutional ownership and cash holding
Under the separation of management and ownership, interest of shareholders and management are no always consist, namely the agency problem rise. Management tend to use the resource to maximum their own benefits instead of value of shareholders. Cash, with the highest liquidity, is the first choice for misappropriate. According to free cash flow theory of Jensen (1986), management tend to hold more cash to increase the amount of assets under their control and to gain discretionary power over the firm investment decision. Cash reduces the pressure of good performance and allows managers to invest in projects that best suit their own interests, but may not be in the shareholder best interest. And less efficient corporate governance would lead to less supervision and greater possibilities of inconsistent behaviors of management. Thus, agency cost increased. Prior research (Shleifer and Vishny (1986), Qiu (2005), McConnell and Servaes (1990), Li (2011)) have found that the involvement of institutional investors would improve corporate governance. After studying the characteristics of institutional investors, I find they have some advantage over individual investors that empower institutions to be a qualified supervisor. First of all, expertise and capital advantage help institutions to make safe investment and right decisions. Teams of analysts are built to analysis the target program and both risks and benefits are always within anticipation. Large amount of capital created by pooling a large sum of money from individual investors make it possible to lower the risks by diversify the investment portfolio. Second, institutions can easily get access to a host of corporate and market data that reduce the effect of information asymmetry individuals may always meet when facing with list firms. Last, institutional investors is much more effective in both corporate and social perspective. Holding a large amount of share would make incentive for institutions to actively involve and influence in corporate governance. They will act as a supervisor to align management’s behaviors
and decision-making with the interest of shareholders. Once an institutional investor establishes a large position of a firm, its actions would be followed as an investment signal by others investors and influence the value of the firm. For example, it would be seen as a pessimistic expectations if an institution investors sell its share and which would reduce the firm value directly. Although it is still controversial on the effect of institutions on corporate governance, I am convinced that institutional investors would improve the corporate governance based on the narrative above. An efficient governance mechanism would mitigate the agency problem and lower the agency cost. Thus, cash would be more efficient used and firm would hold less cash in their balance. Based on this assumption, I come out with my first hypothesis:
H1: Overall share hold by institutional investors has a negative relation with firm’s cash holding.
3.2 Heterogeneity of institutional investors and cash holding
Due to the differences of their characteristics, investment strategy, preference and horizon, institutions would have different impact on corporate governance and subsequently, influence differently on firm’s cash holding policies. Brickley (1988) defined institutional investors into pressure-sensitive institutional investors and pressure-resistant institutional investors. Pressure-sensitive institutions have current or potential business relationship with the target corporates and are less willing to take part in the corporate governance. Pressure-resistant institutions, in contrary, have less interest conflicts with the companies so are more willing to be involved in corporate management to maximum its share value. Heard et al. (1987) and Herman (1981) reveal that banks and insurance companies always have a limit impact in corporate management due to the existent of the business relationship institutions with that listed firm. Institutions having business contacts with invested firms may change their objective and strategy because of the constraint of that relationship (David et al. (1998)). In order to maintain a good contact or to seek for a future communion with
the invested companies, institutions would like to obey the interest of the management and drive themselves to be pressure-sensitive investors (Kochharet et al. (1995)). Due to these investment objective, pressure-sensitive investors can hardly be a good supervisor to corporate governance and bring significant improvement to corporate governance. On the other hand, pressure-resistant investors enjoy a more straightforward objective, that is maximum the value of the share it holds. Pressure-resistant investors would like to monitor the firms to prevent shareholders interest being consumed or misappropriated, or money be invested in risky projects that is beyond acceptable. As a result, the involvement of pressure-resistant institutional investors improve optimize the governance structure and improve the management quality. Kochharet et al. (1995) found that pressure-resistant investors tend to prompt companies to expand the investment in researches and developments while pressure-sensitive institutional investors would have less influence in management decision-making and so the innovation investment. Sherman and Beldna (1998) defined institutional investors into categories: insurance, bank, pension and mutual fund. After studying 271 firms within the Fortune 500, they found that pension companies have positive impact on corporate innovation expense while mutual fund reduce the investment in researches and developments. Bank and insurance have no significant influence on innovation decision-making. Patibandla (2006) revealed that foreign institutional investors will promote companies performances after conducting empirical Research in India.
Nowadays, the institutional investors group in China is mainly constituted by securities investment funds, security company (stock broker), insurance, social security fund, qualified foreign institutional investors (QFII), entrust, finance company, bank and non-finance company. Securities investment fund is the biggest institutional investor in Chinese capital market. It is a professionally managed investment fund that pools money from numerous investors to collectively purchase securities. Securities investment fund share both profit and risk with its investors and have less business relation or conflict with the invested firms. It could be defined as pressure-resistant investor. Security Company is an agent that charges a fee or commission for executing
buy and sell orders submitted by an investor. Generally, investors can only trade stock through security company. Security company have the incentive to remain good communication with listed firms and less willing to take part in corporate governance. So security company could be kind of pressure-sensitive investor. Insurance company and bank, as mentioned before, have lots of contacts with the invested company, most of their income comes from the business with these companies. So it make sense that insurance and bank are pressure-sensitive investors that their investment behaviors effect slightly on firm’s management. Social security fund, taking charge of huge amount of social pension, is responsible to manage and provide retirement income. The principal objective of social security fund is to keep the pension safe without depreciation, and then, invest to achieve value add. Social security fund Incline to invest in long term projects cautiously on the premise of capital safety and liquidity and their businesses are seldom related to invested companies with the purpose of capital safety. So social security fund should be identified as pressure-resistant investors. Qualified foreign institutional investors (QFII) have less business contact with domestic listed company and are more willing to pay effort on monitoring, so QFII should be pressure-resistant investors. Entrust company, which is involved in numerous investment, could be both trustee and invest executive. Its businesses cover a wide range and own close relationship with the invested companies. Thus, entrust could be a pressure-sensitive investors. Finance companies in China are always fund by large enterprise groups. It is an institution that manage money of the groups and help to increase the efficiency of the capital. It is founded more to be functional organization and which decides its low percentage share hold and could not take part in corporate governance. Hence, finance companies are always a pressure-sensitive investors. Non-finance companies, similar to individual investors, aim at maximum the value of their investment. So they will always play active role in their invest behaviors and could be a pressure-resistant investors if they hold enough share to get in the management.
My research would be conducted based on the classification mentioned above. Pressure sensitive institutional investors involve: Security Company, Insurance
Company, Bank, Entrust Company and Finance company.
Pressure resistant institutional investors involve: Securities investment fund, Social security fund, Qualified foreign institutional investors and Non-finance Company.
Table 1 could be better illustrate the classification of institutional investors. According to prior researches, pressure-resistant investors incline to play actively in supervising firms’ behaviors to protect the interest of their share while pressure sensitive investors are less willing to pay effort in monitoring. Based on the assumption in hypotheses one: the involvement of institutional investors in corporate governance could improve the management and result in a more efficient cash use, I come to the following two hypotheses:
H2a: Share hold by pressure resistant institutional investors have a negative relation with firm’s cash holding
H2b: Share hold by pressure sensitive institutional investors have a negative relation with firm’s cash holding
4. Data description
4.1 Data resource and selection
For my empirical analysis of relationship between institutional investor and corporate cash holdings, I use a sample of nonfinancial firms listed on the Shanghai and Shenzhen stock exchanges from 2011 to 2013. Initially, I select all firms in Shanghai and Shenzhen stock exchanges as my target sample for which data are available in the CSMAR database which provides both listed firms’ accounting data and company analysis (investment situation of institutional investors). In order to keep the accuracy and credibility I select the data following the principle. First, financial firms are not selected because financial firms are different from others industries in characteristic and behaviors. Second, those firm with the mark of “ST” are excluded from the sample. Chinese stock exchanges designate as ST (for special treatment) firms with two consecutive years of losses, such companies may impact cash hold policies and directly influence the study result. Third, after calculating overall institutional investor shareholding of each stock, I remove those lower than 5%. As holding an absolute low percentage of share, investors have neither incentive nor power to take part in corporate governance and thus the impact on firms’ management is less significant. Low level shareholding by institutional investors takes up around 60% of the all sample, so it is necessary to be ruled out. Finally, firms with abnormal data or lack of important data would be excluded. The selection remain 869 samples in 2011, 792 samples in 2012 and 803 samples in 2013. Total effective samples are 2464. Three years data is chosen only for sample size expanding, without considering the timely relationship between these years.
4.2 Variables design
4.2.1 Dependent variable definition
The dependent variable in my study is the cash holding of listed firm at the end of every years. Cash holding include cash and cash equivalents and I would count the data both in absolute value and relative value. Absolute value is mainly use in descriptive statistics and relative value is use in regression analysis. According to prior research, there are several way to measure the cash holding. Frist, cash holding could be calculate as the sum of cash and cash equivalents divided by net asset. Net asset is equal to total assets minus the sum of cash and cash equivalents. The second way is based on the result of the first method: to take nature logarithm on the result of first method. Third is the most normal one, cash holding is equal to the sum of cash and cash equivalents divided by total asset. The final way is calculate by the sum of cash and cash equivalents scaled by sales income. In my study, I tend to use the third way to conduct the analysis.
4.2.2 Independent variable definition
The independent variable is the percentage of share institutional investor hold of each stock. For hypotheses one, overall institutional investors share hold would be the sum of different kinds of institutional investors share hold. Similarly, for hypotheses two, shareholding of pressure sensitive and pressure resistant institutional investors would be the sum of the share hold of corresponding investors.
4.2.3 Control variable definition
When designing the control variable in my study, I refer to the prior researches of Wang et al. (2012). The main consideration of the control variable selection is to control the factors that will influence corporate cash hold from financial and corporate governance perspective. My study select the following elements as control variable:
Debt ratio, firm size, cash flow return on asset, net working capital to asset, company growth, capital expenditures to asset, actual controller and dividend payment.
Debt ratio is equal to total liability divided by total asset. It reveals the capital structure of a firm. A certain extend of debt ratio would bring benefit to company, such as leverage benefit or tax shield. However, firms with high debt ratio means a high debt level and a risky financial status. If firm fail to maintain a virtuous circle, financial crisis may occur. A virtuous circle means, for example, debt ratio grow along with a profit increase in a higher grow rate. Then, because of the leverage, equity would have a better development and because of the profit increase, firm have a more powerful solvency and could easily get more fund from debt holder to expand its profit. However, if a firm fail in its operation, it may need a large amount of cash to overcome the financial crisis. To some extent, high debt ratio could be a signal of higher credit ranking that allow company to hold less cash to fulfill the need of operation. But higher debt ratio also require more current assets to maintain the solvency. So the effect debt ratio on cash holding remain unclear in this study.
Firm size is measure by the nature logarithm of the total asset. Generally, firm operational expenditure increase along with the business expand and firm size growth. Company need more cash to cover the interest and debt when total asset increase, given the same risk level and capital structure. So firm size has a significant positive relationship with corporate cash holding.
Cash flow return on asset is equal to cash flow from operational activities divided by total asset. Generally, more cash flow from operational activities means firm have a higher cash hold. But it still depend on the development stage the firm be. Cash flow from operational activities is always stable and predictable when enterprise being mature within its life cycle. Firm in this stage can maintain a low level cash holding while meeting the need of daily operation. The effect cash flow from operational activities on corporate depends on the firm situation.
Net working capital to asset can be used to measure short-term liquidity. Working capital is the difference of current asset and current liabilities. High liquidity of both of its components makes working capital a quick turnover rate and fluctuant. Therefore
it need cautious management to prevent cash flow shortage. Net working capital could be kind of cash equivalent in operations. Higher Net working capital could result in lower cash hold need. So the relationship between net working capital and cash holding is negative. In my study, net working capital to asset is the difference of working capital and cash and cash equivalents, divided by total asset.
Company growth is measure by Tobin's Q Ratio. Tobin's Q Ratio is equal to the ratio between the sum of market value of circulating shares, book value of non-circulation shares and market value of liability and total asset. More develop opportunities the firm faces, more capital needed. One would suffer high opportunity cost if a valuable project missed because of cash flow shortage. In order to snatch chances to develop and expand, enterprise with beneficial prospect would prefer to hoard more cash. So higher company growth would indicate more investment and higher level cash hold.
Capital expenditures to asset, which is the ratio between capital expenditures and total asset, measure the expense on long term investment (fixed asset or intangible asset) that should be capitalized. The increase of capital expenditures would reduce the cash saving, so it should be a negative relationship. There is no certain entry measuring capital expenditures, so in this study, it is measured by the sum of construction in process, engineer material and net value of fixed assets.
Actual controller is a dummy variable in this study. It is marked as “1” when the target enterprise is state owned or the actual controller is official organization. Otherwise it would be marked as “0” which means that the firm is control by private enterprises or natural person. Supported by the government, state owned enterprise have more channel to communicate with the government and stand less constrain in funding. Cash flow shortage can always be cover when profitable projects emerge. From this perspective, state owned enterprise require less cash in balance. However, shareholders of state owned enterprise in China are less conscious to be a supervisor, which make management the actual controller. To meet its own interest, management tend to hoard more cash instead of invest it. So influence actual controller on corporate cash holding is unclear in my study.
Dividend payment is also a dummy variable in my study. “1” stand for firms who have paid the dividend and “0” is for those that remain unpaid. Firm may hoard cash to pay the dividend, so firms that declare to pay dividend may have a higher level of cash holding.
Table 2 summarize the description of the variables
Table 2: Variables description
Variable Definition
Dependent variable
Cash holding
(CASH) Cash and cash equivalents/total asset
Independent variable
Overall share hold of institutional investor (SHALL)
Sum of different kinds of institutional investors share hold Share hold of
pressure sensitive institutional investor(SHPS)
Sum of share hold of Security Company, Insurance Company, Bank, Entrust Company and Finance company
Share hold of pressure resistant
institutional investor(SHPR)
Sum of share hold of Securities investment fund, Social security fund, Qualified foreign institutional investors and Non-finance Company
Control variable
Debt ratio(DR) total liability / total asset Firm size(FZ) LN (total asset)
Cash flow return
on asset(CFA) cash flow from operational activities / total asset Net working
capital to asset(WCA)
( working capital - cash and cash equivalents) / total asset. Company
growth(TBQ) Tobin's Q Ratio Capital
expenditures to asset(CEA)
(construction in process + engineer material + net value of fixed assets) / total asset
Actual
controller(AC) “1” when state owned, otherwise “0” Dividend
5. Regression Analysis
5.1 Model design
To study the influence institutional investors on cash holding, I refer to Brown et al. (2011) to construct the model.
MODEL 1: Cash = α0 +α1 SHALL +∑αi Control +ε
Model 1 examine the influence shareholding of overall institutional investor have on corporate cash holding. Cash as dependent variable would be measure by Cash and cash equivalents divided by total asset. SHALL stand for overall share hold of institutional investor is the independent variable in the model. Control stand for control variables which are Debt ratio, firm size, cash flow return on asset, net working capital to asset, company growth, capital expenditures to asset, actual controller and dividend payment. Similarly, to examine hypotheses two, I build up model 2
MODEL 2: Cash = β0 +β1 SHPS (or SHPR) +∑βi Control +ε
Model 2 examine the influence shareholding of pressure sensitive and pressure resistant institutional investors have on cash holding. Cash stand for Cash and cash equivalents divided by total asset. SHPS (or SHPR) stand for share hold of pressure sensitive or pressure resistant institutional investors. Control variable is similar to model 1
5.2 Descriptive Statistics
This session I would describe the data gathered from Shanghai and Shenzhen stock exchanges from 2011 to 2013
Table 3-1: Descriptive Statistics on Corporate Cash Holding Year 2011 2012 2013 Cash holding (absolute) Mean 1666299556.55 1119652983.64 1148703191.04 Max 88156619000.00 67268146452.70 123400695000.00 Min 1196636.49 17673.26 4422.69 Median 601335552.60 431859598.29 361122533.20 Standard Deviation 5024890458.87 3419406441 5048377171 Cash holding (relative) Mean 0.26 0.19995 0.17558 Max 0.88679 0.83571 0.98429 Min 0.00294 0.00004 0.0000016 Median 0.20000 0.14717 0.14135 Standard Deviation 0.18338 0.16832 0.14352
Table 3-2: Absolute value of average cash holding
Table 3-3: Relative value of average cash holding 0.00 500000000.00 1000000000.00 1500000000.00 2000000000.00 2011 2012 2013
Average cash holding (absolute value)
0.00 0.05 0.10 0.15 0.20 0.25 0.30 2011 2012 2013
According to the table 3-1, table 3-2, table 3-3, Chinese listed firm’s cash holding reveals a significant reduce from 2011 to 2013, both absolute value and relative value. Although a slight increase is witnessed at the end of 2013, I still defined it as reduce after considering the significant drop in the average cash holding to asset. Cash holding does not go along with the growth of total asset. The standard deviation of the cash flow is less fluctuating in these three years, which means that the economic environment for all the industries is stable and the sample I select within this period is less effected by external factors. Table 3-3 reveals that all the three years average corporate cash holding is higher than 15% of the total asset. Peng (2006) study the level of cash holding of Chinese enterprises from 2000 to 2003 and found that the average cash holding is 18.9%. Proportion of cash holdings is still fluctuating in the last 15 years, and even though the percentage drop under 18.9% in 2012 and 2013, the cash holding level still high. Ozkan (2004) found that listed firms in UK keep an 8% cash holding, far less than that in China. Although there are no a widely accepted on a certain optimal cash hold level, cash holding in China is still a high one. This may owing to imperfect capital market development and corporate governance structure.
5.2.2 Descriptive Statistics on Corporate on institutional investor
Table 4-1: Share hold of institutional investors
Year 2011 2012 2013 SHALL Mean 13.0324 13.1820 13.6028 MAX 86.6180 87.8900 86.6200 MIN 5.0000 5.0000 5.0000 Median 9.4850 9.2160 9.7000 Standard deviation 11.4786 11.9562 11.9507 SHPS Mean 2.4702 2.6686 3.5187 MAX 72.4600 72.1300 72.0100 MIN 0.0000 0.0000 0.0000 Median 1.4200 1.4375 1.7680 Standard deviation 3.7831 4.0766 5.2603
SHPR Mean 10.5621 10.5134 10.0841 MAX 86.1680 86.7500 86.1500 MIN 0.0000 0.0000 0.0000 Median 7.4265 6.9160 6.6890 Standard deviation 11.6839 12.2865 12.4178
Table 4-2: Share hold of overall institutional investors
According to table 4-1, 4-2, overall institutional investor shareholding keep slowly growing from 2011 to 2013, which make it an opposite tendency with the cash holding in table 3-3. This works as what I expected in hypotheses one. The maximum share hold of institutional investor is above 86% in 2011 and remain the same level in the next two years. Besides, both the median and standard deviation are stable too. Just as what I have mentioned in descriptive statistics of corporate cash holding, table 4-1, 4-2 shows that the market comes to a mature status and there is no a universal factors (Financial Crisis) that would influence the development of these sample in different industries. The minimum share hold is 5% in every years because samples that less than 5% is excluded for the consideration of effective sample selection.
Share hold of pressure sensitive and pressure resistant institutional investor waver more significant than overall institutions share hold and some interesting change are observed. For pressure sensitive institutional investor, the share hold remain in a lower level which maintain in less than 5%. And contrary to the overall institutions share hold, pressure sensitive institutional investor experienced an
12.6000 12.8000 13.0000 13.2000 13.4000 13.6000 13.8000 2011 2012 2013
Average shareholding of Overall instutitional
investors
increase in 2011 to 2013, especially in 2013 a significant increase is observed from 2.67% in 2012 to 3.52% in 2013. Pressure resistant institutional investor is the main component of the institutional investor group, which remain over 10% in these three years. And unexpectedly, the share hold of pressure resistant institutions has a slightly decrease. Taking the cash holding tendency (Table 3-3) into consideration, the data does not reveal as what I have expected, but the cash go down along with the rise of SHPS and the downturn of SHPR. This is just what the data looks like, further analysis need to be done to figure out their actual relationship.
Institutional investors are classified into two type, but there are actually great difference between each kind of investors. Next I will describe in details how these investors perform in Chinese market.
Table 4-3: Share hold of different kinds of institutional investors
Year 2011 2012 2013 Security Company Mean 1.9414 1.9172 2.6409 MAX 13.2600 12.6340 21.5190 MIN 0.0550 0.0400 0.0900 Median 1.2535 1.2200 1.8950 SD 1.9596 2.0077 2.5629 Insurance Company Mean 2.2397 2.2877 2.3515 MAX 19.1200 19.1200 24.1000 MIN 0.1280 0.0690 0.1000 Median 1.5150 1.6850 1.5820 SD 2.1919 2.1802 2.7801 Bank Mean 4.4518 3.4421 2.9399 MAX 17.9200 17.0200 11.5108 MIN 0.2520 0.2600 0.6200 Median 2.3650 1.2650 1.2275 SD 4.9658 4.1976 3.2074 Entrust Company Mean 2.7390 2.8659 4.4252 MAX 72.2300 71.7700 71.7700 MIN 0.0700 0.0550 0.1200 Median 1.4400 1.5100 2.6950 SD 5.1840 5.3508 6.1572 Finance company Mean 1.7213 2.3024 2.0169 MAX 7.6000 7.6000 6.7800 MIN 0.1970 0.3500 0.1310 Median 1.2520 1.6050 1.8300 SD 1.6551 1.8776 1.4028
Securities investment fund Mean 6.4276 5.8115 5.7594 MAX 25.6490 23.1401 29.2670 MIN 0.1600 0.1040 0.0230 Median 5.7780 5.1200 5.1700 SD 4.3975 4.1012 4.2715 Social security fund Mean 1.9326 2.0228 1.9357 MAX 6.0800 7.0300 8.3860 MIN 0.1620 0.1600 0.1100 Median 1.7500 1.8400 1.6000 SD 1.1551 1.1806 1.4114 QFII Mean 1.4623 2.2291 2.0414 MAX 7.2930 52.5000 52.5000 MIN 0.1400 0.2380 0.1300 Median 1.0100 1.2400 1.1400 SD 1.3571 5.8389 5.3964 Non-finance Company Mean 20.5713 21.1521 21.6779 MAX 80.6500 80.6500 80.6500 MIN 0.4490 0.4300 0.3690 Median 13.7700 14.3900 14.1400 SD 18.8175 19.2289 19.7818
Table 4-4: Percentage of institutional investor investment
Table 4-3 illustrates the average weight different kinds of institutions takes up in their invested companies within the samples. It is worth noting that stocks without investment from a certain kind of institution would not be included in the calculation of percentage of relative institutional investor investment. This explains why Non-financial Company, which invest a small amount of enterprise, own a high percentage of shareholding in the table. And high percentage shows that non-financial company
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 2 0 1 1 2 0 1 2 2 0 1 3
Securities investment fund QFII
Security Company Insurance Company Social security fund Entrust Company Finance company Bank
tend to be dedicated investor – invest in few enterprise with a low turnover while maintain a high percentage in most of the stock they held. Besides, all institutions except Bank and Securities investment fund expand their investment in these three years, showing their confident toward the enterprises they invested.
Table 4-4 illustrates how many enterprises each kind of institutions have invested, showing in percentage. Although experiencing a decline, securities investment fund is still the biggest institutional investor in Chinese market, holding share of more than 80% of the sample companies. Social security fund and entrust company reveal a significant increase. Social security fund come to be the second largest institutional investors in China, demonstrate that the market is now stable and less risky and make cautious investors like social security fund willing to expand their investment.
5.2.3 Descriptive Statistics on control variable
Table 5-1 Control variable descriptive statistics
Year 2011 2012 2013 Debt ratio(DR) Mean 0.4159 0.4194 0.4253 MAX 0.9691 0.9468 0.9832 MIN 0.0071 0.0347 0.0103 Median 0.4112 0.4282 0.4132 SD 0.2176 0.2215 0.2100 Firm size(FZ) Mean 21.9443 21.8535 21.8545 MAX 26.9495 25.9116 27.3874 MIN 18.0077 18.5673 17.8227 Median 21.7469 21.6620 21.6969 SD 1.2530 1.1528 1.1762 Cash flow return on asset(CFA) Mean 0.0319 0.0428 0.0322 MAX 0.4300 0.7012 0.5544 MIN (0.2892) (0.3135) (4.2696) Median 0.0312 0.0378 0.0317 SD 0.0796 0.0872 0.1778 Net working capital to asset(WCA) Mean 0.0434 0.1528 0.1475 MAX 0.8307 4.1034 6.7385 MIN (0.8137) (1.6273) (1.6022) Median 0.0613 0.1474 0.1400 SD 0.2002 0.3679 0.3984
Company growth(TBQ) Mean 1.8463 1.7153 2.2365 MAX 31.3830 10.0737 25.7023 MIN 0.0968 0.1128 0.1202 Median 1.5410 1.4081 1.7145 SD 1.6691 1.3250 2.1522 Capital expenditures to asset(CEA) Mean 0.2556 0.1675 0.1759 MAX 0.9737 0.8161 0.8249 MIN 0.0000 0.0000 0.0000 Median 0.2157 0.1186 0.1278 SD 0.1870 0.1669 0.1688 Actual controller(AC) Mean 0.4055 0.4121 0.3691 MAX 1.0000 1.0000 1.0000 MIN 0.0000 0.0000 0.0000 Median 0.0000 0.0000 0.0000 SD 0.4913 0.4925 0.4829 Dividend payment (DP) Mean 0.7949 0.8394 0.8329 MAX 1.0000 1.0000 1.0000 MIN 0.0000 0.0000 0.0000 Median 1.0000 1.0000 1.0000 SD 0.4040 0.3674 0.3733
Table 5-1 illustrates that listed firm in China have an average debt rate at around 0.42 from 2011 to 2013. It is a relatively appropriate debt for enterprises. Lower than 50% means most of the enterprises can easily cover the debt and maintain a low financial risk. Debt rate over 40% allow companies to keep a robust financing capacity. Standard deviation for debt rate is around 0.2 which means a big difference between each stock, but debt rate ranging from 60% to 20% is still acceptable. As for firms in a well develop and healthy market, debt rate up to 60% will enhance its financing capacity while 20% of debt rate would allow a firm to run safe and maintain a leverage benefit. Firm size is measure by the nature logarithm of the total asset, according to Table 5-1, firm size of the sample is stable at around 22 in these three years. Standard deviation is less than 2, meaning that sample have less significant difference in firm size. Cash flow return on asset measure the cash flow of operational activities, could be a symbol of firm’s operating capacity. According to the data, cash flow experienced a remarkable ascension and reach to 4% in 2012 but later drop to 3% as 2011 in 2013. Fluctuate tend and large standard deviation reveals huge gap between years
development and differences on operation activities of the samples. These may result by the diversity of industries characteristics, enterprises strategy and accounting practices. Net working capital to asset remain a low level in 2011 to 2013. Although it experienced a significant increase in 2012, net working capital is still maintain a small amount that hardly meet the need of cash. High liquidity of current asset and current liabilities make it high standard deviation and also huge gap on maximum net working capital. Company growth is measure by Tobin's Q Ratio, according to table 5-1, both average company growth and standard deviation remain stable in 2011 to 2013. But there is a huge difference between the maximum and minimum company growth is each years, which can range from 30 to 0.9, and maximum company growth between years is fluctuate too. However, such company with extremely high or low Tobin's Q Ratio should be minority that hardly influence all the samples as for the result is stable in each year. Listed firms in China have a considerable capital expenditures in 2011 to 2013, which is 25% in 2011 and drop to around 17% in later two years. Standard deviation is high, namely industries characteristics and enterprise strategy make it huge difference on the capital expenditures. Actually controller, measure by dummy variable, is less than 0.5, meaning that non-state-owned enterprises are the majority in the sample, but state-own enterprises also take a considerable proportion. Dividend payment also measure by a dummy variable. Average dividend payment is higher than 0.5, meaning that in the samples group, enterprises that pay dividend in that year is more than that without paying a dividend.
6. Regression Analysis
6.1 Empirical Analysis on Hypotheses 1
In my research, I would use linear regression model to carry out my study result. I would start with the significant test toward regression model while then test the significant of the regression coefficients. All the studies and analysis are performed by the help of SPSS Modeler 22.
To examine Hypotheses one, the relationship between corporate cash holding and overall share hold of institutional investor, I use Model 1 to conduct the regression analysis. Cash hold is measure by the ratio cash and cash equivalents to total asset from the sample being selected in the period 2011 to 2013. Overall share hold by institutional investors is measure by the proportion institutions take up on the relative firms. Control variables being mention above would be introduced in the regression analysis. Results are as followed:
Table 6-1 Significant Test on Regression Model 1
Model 1 Sum of Squares df Mean Square F Sig. Regression 25.065 9 2.785 151.720 .000b Residual 44.477 2423 .018 Total 69.542 2432
According to table 6-1, the observation of the F-test is 151.720 and the significant approximate zero. Considered the significant level of 5%, the table indicates that the dependent variable, corporate cash hold have a significant linear relationship with the independent variable, overall share hold of institutional investor.
Table 6-2 Cross-sectional regressions of cash holdings on share hold of institutions and other firm characteristics
Dependent Variable: Cash hold to asset R²: 0.360
Model 1 Unstandardized Coefficients
Standardized Coefficients T Sig. B Std.Error Beta (Constant) .356 .064 5.532 .000 SHALL -.001 .000 -.073 -4.360 .000 FZ .003 .003 .024 1.102 .271 DR -.413 .017 -.530 -24.548 .000 CFA .014 .023 .010 .618 .537 WCA -.102 .009 -.201 -11.101 .000 TBQ .007 .002 .074 3.795 .000 CEA -.212 .017 -.224 -12.585 .000 AC -.011 .006 -.031 -1.713 .087 DP .018 .008 .040 2.323 .020
Table 6-2 indicates the result of the regression analysis toward hypotheses one. The first column of the table contains the main component of the model, where corporate cash holding are regressed against overall share hold of institutional investors. The standard coefficients of overall share hold of institutional investors (SHALL) is negative (-0.073) and the significant is lower than 5%, which means that overall share hold of institutional investors have a significant negative relationship with corporate cash hold and this is consisted with my prediction in hypotheses one. The empirical result support the effective supervision hypothesis of institutional investors, showing that institutions as an investor can play an active role as a shareholder to take part in corporate governance, supervise management behaviors and improve enterprise governance structure. My result is consist with the finding of Qi et al. (2005) who have studied Japanese listed firms during the period of 1989 to 2000 and Luo L (2010) who have studied among 175 UK public firms in 1999-2000. Researches conducted in different market come to a similar result, namely institutional investor as a shareholder would reduce agency cost and prevent management to hoard too much cash in their balance.
Although it is not the main focus of this paper, Table 6-2 also presented information about how firm’s characteristics could influence cash holdings in Chinese-listed companies. Control variables reveals some indicators that will influence corporate cash holding in the model. FZ (stand for firm size), which I predict would positively influence cash holding, perform less significant in the regression analysis. In order to further study the influence of firm size on cash holding and find out the flaw of my suppose, I carry out and regression between cash hold in absolute value and firm size and come out with a significant result. Firm size would indeed increase the cash holding. Larger firm size require more money to maintain its operational expenditure and enterprise development. However it is not relate to relative value of the cash holding but the absolute one. I suppose it may relate to scale economies effect that make cash demand less necessary to go with firm development. DR (stand for debt rate) is reveal a negative and significant relation with cash holding. To some certain extent, higher debt rate indicate a higher credit ranking, which make firm
easier financing and hoarding cash would then stand a high opportunity cost. According to the previous narrative of the descriptive statistics on debt rate, listed firms in China own a relatively appropriate debt rate, so it make sense that firm with higher debt rate would tend to hold less cash. CFA (stand for cash flow return on asset) perform less significant in the model either. This may result by the deviation on the data collection. WCA (stand for net working capital to asset) is significantly relate to corporate cash holding. More working capital, less cash hold. It is consist with the expectation that working capital could play a role as cash equivalent in operations and lower the demand on cash, so the negative relation is reasonable. Just as my expectation, TBQ (stand for company growth measured by Tobin's Q Ratio) have a significant and positive relationship with corporate cash holding. Enterprise with beneficial prospect would prefer to hoard more cash to prepare for any valuable project in future. Thus, more develop opportunities, more capital needed. Table 6-2 presents a significantly negative relation between CEA (stand for capital expenditures to asset) and cash holding. It consist with my expectation that more cash use to fulfill the need of capital expenditure, less cash could be hoarded. According to the regression result, AC (stand for actual control) is negative relate to listed firm cash holding with the assumption that state owned enterprise have the advantage on government relations, which make it less constrain and less cost in financing. However the relation is less significant in the model. It might be impacted by the statistical methods. Testing it as dummy variable may influence the result. Same problem may happen to DP (stand for dividend payment) which is observed a positive coefficient toward cash holding. Firms that declare to pay dividend tend to hoard more cash. But the assumption is failed to be proved in the study.
Table 7-1 Cross-sectional regressions of cash holdings on share hold of pressure sensitive institutions and other firm characteristics
Dependent Variable: Cash hold to asset R²: 0.352
Model 2a Sum of Squares df Mean Square F Sig. Regression 17.588 9 1.954 107.781 .000b Residual 32.364 1785 .018 Total 49.952 1794 Model 2a Unstandardized Coefficients Standardized Coefficients T Sig. B Std.Error Beta (Constant) .400 .074 5.432 .000 SHPS -.003 .001 -.094 -4.892 .000 FZ .001 .003 .005 .192 .847 DR -.388 .019 -.504 -20.301 .000 CFA -.016 .025 -.012 -.632 .527 WCA -.092 .010 -.188 -8.942 .000 TBQ .008 .002 .080 3.484 .001 CEA -.187 .019 -.207 -9.954 .000 AC -.021 .007 -.061 -2.963 .003 DP .017 .009 .040 1.978 .048
Table 7-1 presents the empirical result of the regression corporate cash holding toward share hold of pressure sensitive institutional investor. According to the table, observation of the F-test is 107.781 and the significant approximate zero. Considered the significant level of 5%, the table indicates that the dependent variable, corporate cash hold have a significant linear relationship with the independent variable, share hold of pressure sensitive institutional investor.
The result of the regression reveals that pressure sensitive institutional investors as a shareholder would make actual effects on corporate cash holding policies. However, contrary to hypotheses 2a, the coefficient (-0.094) indicates a negative relationship – share hold by pressure sensitive institutional investors would reduce corporate cash holding. In order to find out and further study the reasons, I conduct a regression analysis on cash holding against the components of pressure sensitive
