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Cross-listing and Firm Cash-holding
Levels: Evidence from Chinese Market
Author: Duolun Ma (S2626438)
Supervisor: Dr. Henk von. Eije
Programme: International Financial Management (IFM)
Faculty of Business and Economics, University of Groningen
Abstract:
We examine whether firms from emerging markets cross-listing in developed markets decreases their cash holding ratio. However, we find strong evidence that cross-listing in developed markets lead a substantial increase in firms’ cash holding. Furthermore, we examine whether cross-listing on different destination markets will influence firms’ cash holding differently. We find supportive evidence that cross-listing in different countries will lead different change in firm’s cash holdings. Overall, the research results suggest a rejection of our hypothesis, but the findings still have academic interest.
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1.Introduction
:Empirical evidence demonstrates that national-level institutional frame-works play a crucial role in equity valuation and access to finance (La Porta et al. 1997,1998 and 2000). Accordingly, Charitou et al. (2007) suggest that firms from countries with weak institutional frameworks can mitigate these negative effects by cross-listing in countries with stronger institutional frameworks. Cross-listing in countries with stronger institutional frame-works enables firms to take advantage from capital globalization and funds internationalization. Nevertheless, cross-listing also represents unknown risks and brings substantial changes from many aspects, include legal, disclosure, accounting and corporate governance (Fresard and Salva, 2010). Previous studies investigated the impact that cross-listing could have on firm’s value, cost of capital, information environment, disclosure mechanism and corporate governance. However, there are limited studies on the corporate cash holdings. In order to fill this gap, our research will focus on the relation between cross-listing and the firm cash holding level.
Cash holdings are receiving increased attention in the corperate finance literature. The importance of studying cash holding lies in the fact that firms hold significant
amounts of liquid assets in their balance sheet. Ferreira and Vilela (2004) find an average cash ratio of 15%, Guney et al. (2003) observe an average cash ratio of 14%. And according to Dittmar and Marth-Smith (2007), the proportion of cash and cash equivalents held by large publicly traded US firms was more than 13% to their total assets in the year of 2003.From another perspective, it means that cash and cash equivalents held by publicly traded US firms in 2003 represent approximately 10% of annual Gross Domestic Product (GDP) of the US (see Martinez-Sola et al. 2013). It is thus interesting and meaningful to investigate the cash holding issue, since cash (and cash equivalents) is an important factor affecting firm value.
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holding cash also provides a fund buffer to firms that can absorb their adverse shocks (precautionary motive). Another group of studies (Kim et al., 1998; Opler et al., 1999; Ferreira and Vilela, 2004; Ozkan and Ozkan, 2004; Garcia-Teruel and Martinez-Solano, 2008) investigate the relationship between cash holding rate and firm value. Most of these authors assume that there is an optimal cash holding level, at which point the firm value is maximized. This theory is known as the target cash level
theory. The authors also believe that the optimal cash holding ratio of firms can be
reckoned to follow a partial adjustment model.
Recently, some other researchers (Faulkender and Wang,2006; Tong, 2011; Zhang et
al., 2015) focus on the marginal value of cash. These authors analyze the marginal
value of cash by comparing the incremental of shareholder wealth with each
additional dollar held by the firm. This approach is known as the marginal cash value
theory. They propose that both increasing and decreasing firm cash holdings will
cause corresponding benefits and costs.
Cash held by firms can be classified into target cash holding and excess cash holding. Defined by Dittmar and Mahrt-Smith (2007), excess cash holdings is cash that not necessarily needed for operations or investments. In other word, it is the cash above the target holding level. There is a dissension in regard to excess cash holding Advocates of the free cash flow theory proposes that firms should not hold excess cash; agency costs have the main concern of this group of economists. According to the free cash
flow theory, firms holding free cash will incur considerable costs due to agency
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benefits directly, due to its characteristic of high liquidity (Meyer and Rajan, 1988). Others propose that holding suitable amount of excess cash can be beneficial to firms, because there are multiple advantages excess cash can bring to firms. Those benefits are basically connected with the two initial motives, and we will give a deeper in sight in the following section of this study.
When we survey the cash holdings under the circumstance of capital
internationalization, we assume that the national-level of institutional frame works plays an important role. Zhang et al. (2015) investigated how cash holding contributes to firm’s value differently between Germany and Chinese industrial firms, they find out that amounts of cash are valued differently in distinct countries. The explanation of this phenomenon can be explained from many aspects including protection of investors, development of the national economy and quality of financial institutions.
The main research purpose of this study is not to find out how cash holding affects firms value differently in different capital markets, but to find out whether and how cross-listing affect corporate cash holding ratio. To address these issues, we use Chinese domestic listed firms and Chinese firms cross-listed in the US, Germany and Hong Kong as our sample. There are two main reasons why we choose the Chinese market as our sample. Firstly, China has the second largest national economy in the world, significant numbers of firms in China listed in Chinese domestic equity market as well as do so in foreign equity markets. Secondly, the Chinese market is also classified as a typical emerging market, according to the World Bank, although China has an enormous national economy, its institutional frameworks are still
under-developed.
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and median of cash holding rates of firms. Then we examine how cross-listing affect firms’ cash holding ratios via a set of independent variables and a cross-listing dummy. We use weighted least squares method in this part, where the firm cash holding rate is the dependent variable of our regression model, and several key financial indicators are served as independent variables.
The reason why we believe that the results are relevant and meaningful is because we think analyzing the difference between domestic listed and cross-listed firms provides helpful information to firms who intend to cross-list in the future. The information provided by our paper should be able to reduce the uncertainty and risk of cross-listing in developed equity markets, therefore help management to make better decisions will regard to the cash holding issue.
The reminder of this study is organized as follows. In the second section the theoretical foundations from previous studies are summarized, and the research hypotheses are also introduced in this part. In the third section, we will describe research data and explain the research methodology. In the fourth section, relevant regressions will be presented, and the empirical results will be analyzed. Finally, the fifth part is the conclusion of this study; additionally, research limitation of this paper and future research directions are discussed here.
2.Theoretical Foundations and Development of Hypotheses
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liquid asset would not bring firms benefits or costs. In such a market, investors are fully informed and minority shareholders’ wealth is always maximized (Pinkowitz and Willianmson, 2007), therefore no agency cost would happen since there is also no asymmetric information. Theoretically, the irrelevance of liquid assets implies that cash holding decisions of management would not affect firm’s performance.
However, in the real financial world, firms operate in markets with agency fees, asymmetric information, transaction costs and government policies and the perfect market assumption does not hold. Keynes (1936) presents two motives to hold cash. On the one hand, firms need cash to maintain daily operations and to preserve them from unexpected cash shortfall (transaction motive). On the other hand, cash can be used as internal finance resource with low transaction costs (precautionary motive). For example, firms also hold cash for investing motive: liquid assets also enable firms to take advantage of profitable investment opportunities. Nevertheless, holding cash also gives negative influence to firms, when the cash held by firms is invested into projects with negative NPV, or if the internal fund is transferred to managers’ private interests, the agency problem arises.
2.1 Trade-off, Pecking-order and Free Cash-flow theories
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between the opportunity costs of holding too much cash and the costs of holding too little. Companies with excess cash on hand will not be missing out on investment opportunities, while companies that are cash poor can often be forced to make otherwise undesirable transactions to free up operating capital.
The benefits of corporate cash holdings are multiple, they derive from two essential motives, as explained by Opler et al. (1999). Firstly, the transaction motive suggest that cash reserve plays a role as an internal fund pool, which supports the firm’s daily payments without extra transaction cost. According to this motive, corporate cash holdings are used as a buffer between the firm’s sources and uses of funds, meanwhile with the minimum transaction costs (Ferreira and Vilela, 2004). The precautionary motive refers to the stockpiling of cash as a buffer to absorb adverse shocks, especially when capital market may not be able to provides funds for growth.
However, Myers and Majluf (1984) suggest that firms do not set specific cash-holding goals. Their pecking order theory states that the dominant cost factor in finance is information asymmetry. They explained asymmetric information consists in all
finance resources, more specifically, the relation between asymmetric information and finance cost is positive, the management therefore gives priority to internal finance resources, since the high information asymmetry level of debt and equity makes them costlier (Myers and Majluf, 1984). To minimize the finance costs, firms will always prefer to use cash as an internal finance resource; thereafter they turn to debt and finally if necessary, they turn to equity. Comparing with raising funds from financial market or external investors, corporate cash reserve is not only a more convenient resource but also less costly. Although there are many finance resources that could be used by firms when they need to raise funds for operations or investments, for
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pronounced. These costs include interest payment (debt cost), dividend payment (equity cost), and origination fees. Besides, raising external funds could cause long-term costs for firms, for example, issuing new shares would lead to the potential risk of losing control; loans and bonds would bring a high leverage, which could give negative impacts to firms in bad times.
The free cash-flow theory assesses benefits and costs from another perspective, Jensen’s (1986) free cash-flow theory suggests that firms may not choose to hold the amount of cash that will maximize shareholder wealth; their managers prefer to hold more. Therefore, investors always evaluate firm’s excess cash holding at a discount rate due to the agency problem and agency costs will ultimately undercut firm value. Free cash flow is defined as the cash flow left in a firm that all the available positive NPV projects have been invested. Jansen (1986) states that the managers would rather invest the free cash flow into negative NPV projects than pay it out to investors as dividends. The reason that managers do so is because they generally give a priority to operational investment, even if such investments are suboptimal and would threaten shareholder wealth (see also Harford et al. 2008; Dittmar et al. 2003). Managers are generally willing to hold cash, because with cash holding at his or her disposal, the managers can propose projects efficiently, meanwhile averting the capital markets and their demands for transparency (Ferreira and Vilela, 2004). However, shareholders may downgrade a share when they believe managers may be exploiting an excess corporate cash holdings for themselves and there is empirical evidence showing that corporate free cash flow does have a negative relationship with the return of the shareholders.
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Myers and Rajan (1998), cash can be transformed into private benefits more easily than other assets. Fixed asset like plants or equipment cannot disappear, but cash can (see Pinkwitz et al. 2003). There are several ways to alleviate agency problem, both good corporate governance and good investor protection demonstrate to be effective; Dittmar and Mahrt-Smith (2007) show that cash holdings are more valuable for firms with higher governance quality. More recently, Fresard and Salva (2010) found that firms cross-listed in the US hold less excess cash than their domestic competitors. Denis and Sibilkov(2010) show that cash holdings are more valuable for small size (financial constrained) firms because higher cash holdings allow them to undertake value-increasing opportunities that might otherwise be missed out.
2.2 Cross-listing and Firm Cash Holding
Cross-listing of shares happens when a firm lists its equity shares on one or more foreign stock exchanges in addition to its domestic exchange. The academic literature has identified a number of different arguments to cross-list abroad. Economists distinguish several motivations as follows:
Market segmentation: The traditional argument for why firms seek a cross-listing is
that firms can reduce their finance cost by cross-listing because cross-listing removes the national barrier of capital markets, as the risk premium resulting from the
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Market liquidity: Firms can enhance the liquidity of their equity shares by
cross-listing on deeper markets with higher liquidity, as thus reducing their capital expenditure. Foerster and Karolyi (1998) reveals that after Canadian firms cross-listing on US exchanges, the trade volume of their equity shares increased and the spreads effectively decreased.
Information disclosure: Cross-listing on a foreign market can reduce the cost of
capital through an improvement of the firm’s information environment. On the one hand, strict listing and accounting regulations deter cross-listings (Saudagaran and Biddle 1992). On the other hand, adapting higher legal and accounting disclosure mechanism (i.e. Sarbanes-Oxley Act, US GAAP), firms can reach a higher level of information environment with less asymmetric information(Cantale 1996, Fuerst 1998, and Moel 2001). As we discussed earlier, since information asymmetry is directly connected with costs of capital, firms can also for this reason be expecting a lower finance cost after they cross-listing in more developed markets.
Bonding Effect: Related to this, there is a growing academic literature on the so-called
"bonding" argument. Coffee (1999), Stulz (1999), and Black (2001) argue that firms can “bond” themselves with higher standards of investor rights protection by cross-listing, “bonding” themselves with high investor protection standards makes firms more attractive to potential funds providers. Doidge et al. (2004) show that firms cross-listed on developed capital markets have higher corporate valuation in comparison to not-cross-listed firms, especially when the firms have higher growth opportunities. As stated by Reese and Weisbach (2002) and Lins et al. (2005), firms from countries with poorer investor protection cross-listing on markets with stronger investor protection leads to greater subsequent equity issues and a relaxation of capital constraints. Additionally, Troeger (2007) argues that firms may also benefit from cross-listing because the can gain a reputation premium.
Other motivations: Cross-listing is an “eyeball grabbing” event, and it is good for the
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identification. Firms may furthermore be cross-listing to facilitate foreign acquisitions. Also, cross-listings tend to be associated with increased media attention, greater analyst coverage, better analysts’ forecast accuracy, and higher quality of accounting information (Baker et al. 2002, Lang et al. 2003).
The previous theoretical arguments can be applied to developed and emerging
markets. In general, emerging markets are characterized by the under-development of financial institutions and under-developed legal system (Zhang et al. 2015); therefore, emerging markets also tend to have lower standards of corporate governance and weaker investor rights protection (La Porta et al. 1997). Furthermore, there are also significant differences between emerging and developed markets regarding to market liquidity and efficiency.
Pinkowitz et al. (2003) argued that firms in countries with poor protection of investor rights significantly hold more cash than others. A dollar of cash in only worth about $0.65 to the minority shareholders of firms in such countries, whilst approximately $1 in countries with good investor rights protection and high financial development. Similarly, Fresard and Salva (2010) propose that comparing with their domestic peers, investors of non-US firms listed on US exchanges attach substantially greater value from excess cash reserves. Firms from emerging market cross-listing on a developed capital market will affect themselves in many aspects, and we assume it will also change the cash holding policies of firms.
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Graph 1: Relation of Cash Holding Rate and Cash Holding Premium
Optimal cash level (CL) Optimal cash level(DL) Cash Holding Rate
Notes: Cash-holding premium represents the benefits that cash holdings contribute to firms minus the costs they cause. Optimal cash level is the specific cash holdings rate that firms receive the maximum benefits from cash holdings, at this point the marginal benefits of holding cash equals to the marginal costs.
As we can see in graph 1, the premium that firms can get from holding cash will change as the holding ratio varies. We assume that cross-listed firms tend to have a lower cash holding rate. Because the higher cash using efficiency allows them reach the optimal cash holding level with less cash holdings. Our hypothesis is as follow:
Hypothesis 1: Firms from emerging markets cross-listing on developed capital markets will lead them to reduce their cash holding ratio.
Furthermore, we also expecting that firms cross-listing in different countries will also demonstrate different in regarding to the influences brings by cross-listing, since the national level factors can be heterogeneity among distinct developed countries. As
Cash-Holding Premium
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mentioned earlier, those factors include legal and accounting system, efficiency and quality of financial institutions, corporate governance regulations. Taken together, our second hypothesis is:
Hypothesis 2: Firms from emerging markets cross-listing in different developed countries will have varying degrees of impact to their cash holdings.
2.3 Determinants of Cash Holding Rate
Suggested by many previous cash holding researches, the optimum cash holding level for each specific firm is different, and the factors affect optimum cash holding are multiple. The main factors give influence to firms’ cash holding level are firms size, investment opportunities, leverage, capital expenditure, dividend payment, cash flow and business volatility.
Firm size: Previous cash-holding studies tress the crucial role of corporation size.
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Numerous empirical studies support for these positions. The negative relation between cash-holding ratio and corporate size are confirmed by Opler et al. (1999) in a research of US listed firms from 1971 to 1994. Similarly, Ozkan and Ozkan (2004) acknowledged similar results in the UK market when they investigated non-financial UK firms between 1984 and 1999. Bates et al. (2009), Ferreira and Vilela (2004) and Harford et al. (2008) found the same negative correlation in their studies. It is remarkable that the commonly employed approach to measure firm size in earlier studies was either total assets (Bates et al., 2009; Ferreira and Vilela, 2004; Opler et al., 1999) or total sales revenue (Hardin et al., 2009; Ozkan and Ozkan, 2004)1. Based on
the empirical findings, we expect a negative relation between Chinese listed firms, however taking cross-listing issue into account.
Investment opportunities: Argued by Hardin et al. (2009), firms holding liquid assets
including cash and marketable securities have higher probability of creating positive NPV investment opportunities, since externally financed firms face higher finance costs. For this reason, firms with greater profitable opportunities may also hold greater liquid assets to allow them to take advantages from those opportunities. This positive relationship between the firm cash holding level and firm investment opportunity is also confirmed by others. Bates et al. (2009) explain the relationship from the perspective of precautionary motive and opportunity costs, they state that those firms with higher investment opportunities need to hold more cash against adverse shocks because financial distress is costlier for them and higher opportunity costs happens to them in comparison with other firms who have less investment opportunities. The arguments made by Harris and Raviv (1990), Ozkan and Ozkan (2004), Shleifer and Vishny (1992), and Williamson (1988), also show supportive in regarding to the precautionary motive theory.
The positive correlation between cash holding and firm investment opportunities are
1
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commonly confirmed by empirical results (Bates et al., 2009; Ferreira and Vilela, 2004; Hardin et al., 2009; Kim et al., 1998; Opler et al., 1999; Ozkan and Ozkan, 2004). In this study, we also predict a positive correlation between investment opportunities and cash holding ratio for both Chinese domestic-listed firms and cross-listed firms. Market-to-book value ratio employed as our proxy for firms’ investment opportunity.2
Leverage and Capital Expenditure: There is no unanimous point of view regarding
to the relation between cash holding and firms’ leverage. Two contrary theories are supported by different groups of scholars. As discussed by Ferreira and Vilela (2004), firms with higher leverage ratio may hold more cash due to the higher risks of bankruptcy. To reduce the probability of cash short fall, these firms also have higher appetite to increase cash reserves. Nevertheless, Hardin et al. (2009) contend there is a negative relation between cash holdings and leverage, because a high debt rate can be used as a bonding mechanism to cut down the agency costs that are suggested by the free cash flow theory. Jensen (1986) also argues tha higher use rate of debt can pressure managers to allocate fund more efficiently, thus to reduce the likelihood of eroding shareholders’ wealth. Bates et al., 2009; D’Mello et al., 2008; Ferreira and Vilela, 2004; Kim et al., 1998; Opler et al., 1999; Ozkan and Ozkan, 2004 also find empirical results to support this hypothesized negative relationship in their studies. We expect a negative relationship demonstrate in our sample.3
Dissention also exists in terms of the relation between capital expenditure and cash holdings. According to Bates et al. (2009), cash holdings as firms’ internal resource are reversely related to the firms borrowing capacity, as thus they assume a negative correlation between cash holdings and capital expenditure. Moreover, capital expenditures improve or create new assets to firms eventually. Since assets can be used as collateral in financial activities, they also enhance firms’ borrowing capability, and
2
We use year ending price of common equity divided by the book value of common equity to measure the market-to-book ratio.
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less cash will be needed. Riddick and White (2009) hold an opposite point of view, they suggest that high capital expenditure represents high potential risk of financial distress, therefore the relationship between cash holdings and capital expenditure ought to be positive because these company with higher risk are more likely hold more cash as buffer fund. Empirically, Bates et al. (2009) report supportive evidence of a negative relationship. While Opler et al. (1999) found results support to the contrary. Following the findings of Opler et al. (1999), we predict a positive relationship between cash holdings and capital expenditure in Chinese listed firms. The measurement of capital expenditure employed in this study is capital expenditure to total assets.
Dividend paying: A large number of researchers assume that firms’ dividend policy is
closely connected with their cash holdings rate both in the direct and indirect aspect. Ferreira and Vilela (2004), Opler et al. (1999) suggest that firms can easily raise fund by cutting down their dividend payment, thus a negative relationship between cash holding and dividend payout ratio is expected by them. However, contrarily, Ozkan and Ozkan (2004) propose that a high dividend payout ratio represents greater obligation to shareholders, therefore firms with high payout ratio tend to hold more cash due to fears of being caught short of cash and to risks being unable to fulfill their promise to shareholders.
Some empirical studies demonstrate to be supportive to the opinion that the relation between cash holdings and dividend payment is negative (see Bates et al. 2009), while others confirm a positive correlation of the two (see also Opler et al. 1999). Interestingly, Ferreira and Vilela (2004) and Ozkan and Ozkan (2004) assert that firms’ dividend policy in irrelevant to their cash holdings, since they failed to find out the significance of correlation in their research.4 In line with Bates et al. (2009), we expect a negative
relationship between these two.
Cash flow: There is no consensus among academics regarding the relationship between
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firm cash flow and cash holdings. Opler et al. (1999) predict that increasing supply of cash from operations will lead a lower use rate of external funds, and as consequence, a higher cash holding rate; hence they expect a positive relation between these two. Nevertheless, some other researchers assert that the relation should be negative Jensen (1986) and Hardin et al. (2009). They explain that the increase of cash flow will decrease the potential need for cash holdings. Both of the hypothesized relation are supported by some empirical evidence, Ferreira and Vilela (2004) and Ozkan and Ozkan (2004) confirmed a positive association between cash flow and cash holdings, whilst Hardin et al. (2009) discovered a negative relationship between them. We also expecting a positive relationship between cash flow and cash holdings following the logic of Ferreira and Vilela (2004) and Ozkan and Ozkan (2004).5
Business risk is defined as the risk inherent in the firm, independent of the way it is
financed, the main cause of business risk is the volatility of business performance (Gabriel and Baker 1980). Both unusual market movements and firm own strategy changing can lead volatility in firms’ business performance. Two main indicators of business risk are operation income and cash flow. In this study we expect a positive relation between firm business volatility and firm cash holdings because we assume that high volatility of business performance will stimulate the precautionary motive of firm’s cash holdings. 6
5
We use cash earn per share divide by share year ending price as the measurement of cash earning capability.
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We summarize our expectations in table 1 as follow:
Table.1 summary of expectations Dominants Expecting
Correlation
Reference Notes
Firms Size (-) Opler et al. (1999)
Investment Opportunities
(+) Bates et al. (2009)
Leverage (-) Hardin et al.
(2009)
(+) is also possible according to Ferreira and Vilela (2004)
Capital Expenditure
(+) Opler et al. (1999) (-) is also possible according to Bates et al. (2009)
Dividend (-) Bates et al. (2009) Both (+) and insignificant correlation are also supported by empirical results.
Cash Flow (+) Opler et al. (1999) (-) is also possible according to Hardin et al. (2009)
Business Risk (+) Ferreira and Vilela (2004)
3.Methodology and Data
This section describes the methodology used to measure the cash holding level of firms and details the construction of the sample.
3.1 Measuring the cash holding level of firms
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(3) cash and marketable securities/ (total assets - cash and marketable securities) (Opler et al., 1999); (4) cash and marketable securities/ total assets (Bates et al., 2009; Kim et al., 1998). In this paper we follow and adapt the approach of Bates et al., 2009 and Kim et al., 1998, use the ratio of cash and cash equivalent to assets as the
measurement of cash holding level. Specifically, in our study, we employ the natural logarithm of cash holding ratio due to a skewed distribution of original data.
3.2 statistical analysis
We first use univariate comparisons to determine if there are significant differences between cash holding ratio between Chinese domes-listed firms and cross-listed firms. Then the weighted least squares (WLS) method is used to estimate the roles of firm size, investment opportunities, leverage, cash-flow, business risk, capital
expenditures and dividend payout policy. The reason we use WLS regression analysis is because it can improve the reliability of our regression by properly handling the possibility of heteroscedasticity, which can be a common situation in cross-firm regression (see Kleinbaum et al., 1988) We employ a panel data consisting of information of Chinese firms listed in China, US, Germany and Hong Kong from 2005 to 2015. The basic specification of this paper is as follow:
𝐶𝑎𝑠ℎ𝑅𝑎𝑡𝑖𝑜𝑖,𝑡 = 𝛼 + 𝐶𝑜𝑢𝑛𝑡𝑟𝑦𝐷𝑢𝑚𝑚𝑦𝑖 + β1𝑆𝑖𝑧𝑒𝑖,𝑡−1+ β2𝑀𝑇𝐵𝑉𝑖,𝑡−1+
β3𝐶𝑎𝐸𝑥𝑝𝑖,𝑡−1+ β4𝐿𝑒𝑣𝑖,𝑡−1+ β5𝐷𝑖𝑣𝑖,𝑡−1+ β6𝐶𝐹𝑖,𝑡−1+ β7𝑅𝑖𝑠𝑘𝑖,𝑡−1+ 𝜀𝑖,𝑡 7
Eq. (1) Where 𝐶𝑎𝑠ℎ𝑖,𝑡 is the firms’ holding rate. 𝑆𝑖𝑧𝑒𝑖,𝑡−1 is the natural logarithm of annual
sales revenue lagged 1 year; 𝑀𝑇𝐵𝑉𝑖,𝑡−1 refers to the market-to-book value of equity
lagged 1 year, for ease of notation, MTBV calculated as year ending market value of common share divided by book value of common share, suggested as Ferreira and Vilela (2004), the market-to-book ratio reflects the likelihood that a firm will have
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positive-NPV projects in the future, this variable allows us to capture the investment opportunities effect;𝐶𝑎𝐸𝑥𝑝𝑖,𝑡−1represents capital expenditure of firm and 𝐿𝑒𝑣𝑖,𝑡−1 is the finance leverage of firm, calculated as capital expenditure divided by total asset and total debt divided by total common equity respectively, these two variables reveal the influence to cash holding policy from the perspectives of financing and capital expenditure. We take 1 year lagged values of capital expenditure as well as leverage; 𝐷𝑖𝑣𝑖,𝑡−1 represents firms’ dividend payout ratio, computed as dividend per share divided by earning per share lagged 1 year; 𝐶𝐹𝑖,𝑡−1 measures the cash flow,
computed as funds from operation divided by sales revenue lagged 1 year. 𝑅𝑖𝑠𝑘𝑖,𝑡−1 indicates firms business risk, in attempting to assess the firm’s business risk, the author measured performance volatility using the standard deviation of operating income to sales revenue ratio for previous three years. Importantly, this equation only demonstrates effective under two assumptions. The first assumption we made is that the listing status of a specific firm remains the same. Following this assumption, the 𝐶𝑜𝑢𝑛𝑡𝑟𝑦𝐷𝑢𝑚𝑚𝑦𝑖 do not need to control for period. In order to observes how does cross-listing affect firm’s cash holdings, we utilize dummy in eq. (1),
𝐶𝑜𝑢𝑛𝑡𝑟𝑦𝐷𝑢𝑚𝑚𝑦𝑖 equals to 1 if a firm is classified as cross-listed, otherwise 0.
Second important assumption is that we assume all the independent variables do not affect domestic-listed firm and cross-listed firm differently, therefore we do not give change to the slope parameters.
As mentioned earlier, each country has different qualities of financial institutions and markets, the intensions of investors rights protections are also reveals heterogeneity. To capture the national-level differences among countries, we utilize another equation based on the development of eq. (1):
𝐶𝑎𝑠ℎ𝑅𝑎𝑡𝑖𝑜𝑖,𝑡 = 𝛼 + 𝐶𝑜𝑢𝑛𝑡𝑟𝑦𝐷𝑢𝑚𝑚𝑦(𝑈𝑆)𝑖 + 𝐶𝑜𝑢𝑛𝑡𝑟𝑦𝐷𝑢𝑚𝑚𝑦(𝐺𝐸𝑅)𝑖 +
𝐶𝑜𝑢𝑛𝑡𝑟𝑦𝐷𝑢𝑚𝑚𝑦(𝐻𝐾)𝑖 + β1𝑆𝑖𝑧𝑒𝑖,𝑡−1+ β2𝑀𝑇𝐵𝑉𝑖,𝑡−1+ β3𝐶𝑎𝐸𝑥𝑝𝑖,𝑡−1+ β4𝐿𝑒𝑣𝑖,𝑡−1+ β5𝐷𝑖𝑣𝑖,𝑡−1+ β6𝐶𝐹𝑖,𝑡−1+ β7𝑅𝑖𝑠𝑘𝑖,𝑡−1+ 𝜀𝑖,𝑡
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Where CountryDummy(US) is equal to 1 for firms cross-listing in the US, other wise 0; CountryDummy(GER) is equal to 1 for firms cross-listing in Germany, other wise 0; CountryDummy(HK) is equal to 1 for firms cross-listing in the Hong Kong, other wise 0; other variables remain the same as we had in eq (1).
3.3 Sample, Data and Summary Statistics
In this study, we use a sample consisting of Chinese domestic listing firms and Chinese cross-listing firms. Specifically, in this study, cross-listed firms refer to the firms cross-listed in the US, Germany and Hong Kong, since these three
countries/areas are chosen by most firms as their cross-listing target regions. Moreover, the US and Hong Kong are the largest capital markets in North America and East Asia, and Germany has one of the largest capital markets in Europe continent. It is thus interesting to investigate how firms from one same emerging market make different decisions regarding to cash holding policy when they listed on different developed foreign equity markets.
Firm level stock market data is obtained from DataStream which who gives access to Thomson Financial’s Worldscope database. The initial sample data of Chinese domestic listing firms consist of all the firms listed on the Shanghai and Shenzhen exchanges. The definition of Chinese cross-listing firms is firms operating in China (in DataStream, the “market” character is “China”) and listing their common equity share on a foreign exchange (the character of “exchange” is a foreign exchange). Therefore, cross-listing firms are firms listed on US exchanges (Nasdaq, NYSE, also Non-Nasdaq OTC), Germany exchanges (Berlin and Frankfort exchanges) and the Hong Kong exchange. All the initial financial and accounting data refer to financial years from 2005 to 20158.
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Firstly, firms with incomplete key financial data9 are exclude from our sample, then
we exclude financial firms (Standard Industry Classification (SIC) code between 6000 and 6999 because their businesses imply holding marketable securities and statutory capital requirements that could affect their investment choices, accordingly, firms with missing SIC code are exclude from our sample. To reduce the effect of outliers, we trim our sample at 1% in each tail of crucial variables.
In attempting to ensure the comparability of all the monetary variables, local currencies need to be converted into a common currency (US dollar). We use the historical exchange rates provided by DataStream to complete this process. the number of firms are provided in table 2.
Table 2 Panel: Number of Observations by Country
Market Number of firms Number of firm-years
China(Domestic-list) 2561 14536
US(Cross-list) 393 2495
Hong Kong(Cross-list) 1092 6056
Germany(Cross-list) 931 5421
Total 4977 28508
Notes: This table gives the information of the number of Chinese listed firms in our sample classified by the origin of markets they listed on, and the number of firm-years available for those cross-listing firms. There is a small group of firms who cross-listing on more than one foreign market, we keep them in both of the listed markets because we assume this would not give a significant influence to our regression result.
Before we start analyzing, a correlation matrix to determine the if there are high correlations exist among variables. Results of the matrix are provided in appendix due to limited space. We do not observe any high correlations exists among the
9
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independent variables, which could lead potential problems of multi-collinearity and, consequently, inconsistent estimations.
4. Main Results
In this section, we report and analysis the results of our main regression. In subsection 4.1, we first list the descriptive statistics of our regression sample groups by their listing status (domestic-listing and cross-listing), to examine whether those two group are statistically different with each other we employ univariate analysis. Then we examine our main research question – cross-listing firms tend to have lower cash holdings, via a weighted ordinary least regression (WLS) include cross-listing dummy variables in subsection 4.2. Finally, in attempting to reinforce our conclusions, we carry out several robustness tests in subsection 4.3.
4.1 Univariate Comparisons of Domestic-listed and Cross-listed firms
To determine the differences of cash holding ratio between Chinese domestic-listed firms and Cross-listed firms, we compute two-sample Wilcoxon tests and report the results in table 3.
Table 3. Univariate Tests of Variables
Domestic Listed Firms Cross Listed Firms
Variable N Mean Media n
N Mean Median Mean
T-test Median W-test Cash Ratio 22281 22.847 (%) 17.852 (%) 23411 19.895 (%) 15.601 (%) -19.445 *** 16.561 *** Note: W-test is the value of Wilcoxon/Mann-Whitney median test method; test represents the T-statistical of means; ***, **and * represent T-statistical significance at the 1%,5% and 10% test level respectively.
Discussion
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and cross-listed firms, the results also demonstrate a negative opinion to the hypothesis that the distribution of cash holding ratios of domestic-listed and cross-listed firms are identical. Specifically, Chinese domestic-listed firms generally have a higher cash holding ratio, the mean and median are 22.847% 17.852% for Chinese domestic-listed firms; meanwhile Chinese firms who cross-listing in developed markets have a mean of 19.895% and a median of 15.601%.
4.2 How does cross-listing affect firms’ cash holding policy
To test the hypothesis that we delineated in Section 2, we estimate firms’ cash holding rate by all the independent variables for the whole sample, cross-section weighted least squares method is employed in this regression. In attempting to capture the effects that firms from emerging markets cross-listing on developed markets, we use dummy variables in the equation. Results are reported in table 4.
Table 4 Regression Cash holding ratio of Chinese firms: cross-listed versus
domestic-listed. Cross-Listed Firms (1) Cross-listed Firms(US) (2) Cross-listed Firms(GER) (3) Cross-listed Firms(HK) (4)
variables Coefficient Coefficient Coefficient Coefficient
25 / 40 (table 4. continued) 𝑪𝒐𝒖𝒏𝒕𝒓𝒚 𝑫𝒖𝒎𝒎𝒚𝒊 0.172*** [33.95] 0.061*** [8.94] 0.135*** [22.01] 0.127*** [21.43] Number of Obs* 28369 28369 28369 28369 Adjusted R^2 0.30 0.31 0.53 0.51
Note: this table reports the results of fixed cross-section weighted least squares, examining the
cash holding rate covering the period 2005-2015, all the variables trimmed at 1% tails. The dependent variable 𝐶𝑎𝑠ℎ𝑅𝑎𝑡𝑖𝑜𝑖,𝑡 represents the cash holding ratio of firms, calculated as (Cash+ marketable securities) / Net sales revenue lagged 1 year, we employ natural logarithm value. 𝑆𝑖𝑧𝑒𝑖,𝑡−1 is the natural logarithm of annual sales lagged 1 year. 𝑀𝑇𝐵𝑉𝑖,𝑡−1 represents market-to-book ratio, computed as market price (year ending) of common share divided by book
value of share lagged 1 year. 𝐶𝑎𝐸𝑥𝑝𝑖,𝑡−1 indicates capital expenditures of firms, computed as
(Capital Expenditure/ Total Asset) *100 lagged 1 year. 𝐿𝑒𝑣𝑖,𝑡−1 stands for financial leverage,
calculated as Total Debt/Common Equity lagged 1 year, if common equity is not available, policyholder’s equity is substituted. 𝐷𝑖𝑣𝑖,𝑡−1 is the dividend payout ratio of previous year, calculated as Dividend per Share/ Earn per Share lagged 1 year. 𝐶𝑎𝑠ℎ𝐹𝑙𝑜𝑤𝑖,𝑡−1
computed as funds from operation/ total sales revenue. Risk is the standard deviation of
cooperating income covering previous three consecutive financial years. T-statistics are in
brackets. In column (1), we regression the whole sample, we set 𝐶𝑜𝑢𝑛𝑡𝑟𝑦𝐷𝑢𝑚𝑚𝑦𝑖 equals to 1 for firms cross-listing in other countries and 0 otherwise. In column (2), (3) and (4), we changed the binary variable: 𝐶𝑜𝑢𝑛𝑡𝑟𝑦𝐷𝑢𝑚𝑚𝑦𝑖 equals to 1 for firms cross-listing in the US
(column 2), Germany (column 3) and Hong Kong (column 4) respectively, and otherwise 0. *, ** and *** indicates statistical significant level at 10% 5% and 1% respectively.
26 / 40 Table 5: Comparisons of National Level Difference
variables Coefficient Dummy (US) 0.145*** [21.26] Dummy (GER) 0.166*** [25.81] Dummy (HK) -0.184 [26.63] Number of Obs* 28369 Adjusted R^2 0.31 F-test #1 (p-value) 0.006*** F-test #2 (p-value) 0.010*** F-test #3 (p-value) 0.000***
Notes: in this table, we estimate eq. (2), we do not report all the parameters in this table because of limited space. F-test #1 tests the hypothesis that dummy(US) equals to dummy (GER), F-test #2 tests the hypothesis dummy(GER) equals to dummy(HK) and F-test #3 tests hypothesis dummy(US) equals to dummy(HK). *, ** and *** indicates statistical significant level at 10% 5% and 1% respectively.
Analysis and Discussion
Domestic-listing and Cross-listing
In column 1, the coefficient of 𝐶𝑜𝑢𝑛𝑡𝑟𝑦𝐷𝑢𝑚𝑚𝑦𝑖 is 0.172, which is positive and statistically significant. According to this parameter, we can draw a conclusion that cross-listing on developed markets will lead an increase in Chinese firms’ cash holding ratio significantly. This result also suggests that the hypothesis of this paper should be rejected. Turning to specific capital markets, the coefficients of
𝐶𝑜𝑢𝑛𝑡𝑟𝑦𝐷𝑢𝑚𝑚𝑦𝑖 for the US, Germany and Hong Kong are 0.061, 0.135, 0.127
respectively, and all of them demonstrate significant at 1% significance level. This reveals that cross-listing in Germany and Hong Kong markets raises Chinses firm’s cash holding ratio to a larger extent in comparison of listing in the US.
Additionally, the coefficient between cash holdings and firms size is negative and statistically significant, which is consistent with our expectation. MTBV has a
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variables of leverage and capital expenditure have negative coefficients, it means that firms with higher capital expenditure and leverage tend to hold less cash. As
explained by Hardin et al. (2009), capital expenditure will be transferred to firms’ assets eventually, incremental in assets enhances firms borrowing ability,
consequently those firms will have less incentives to hold large amount of cash. In terms of leverage, suggested by Bates et al. (2009), high using rate of debt resource can be seen as a bonding mechanism to cut down the agency costs because it can pressure managers to allocate funds more efficiently. Dividend payout ratio is positively connected with cash holdings, which indicates that firms paying higher dividend also holding more cash in hand. Comparing with other independent
variables, cash flow shows less relevant, it has a positive and significant coefficient, however it is extremely small. Lastly, to our surprise, the coefficient of business risk is negative and statistically significant, following this finding, we conclude that firms with higher performance volatility tend to hold less cash.
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By analyzing the results of table 5. The results demonstrate supportive to our second hypothesis that cross-listing in different countries will have different influence to firms’ cash holdings. All of three f-test suggest us to reject the hypothesis that country dummies of the three distinct countries are identical.
4.3 Robustness Tests
In this subsection, we carry out several robustness tests, by assess results provides in Table 3 and unreported analyses, our conclusions remain robust to different estimation methods, different observation sample, and different specifications.
As mentioned in earlier section of this study, we made two important assumptions in Eq. (1), one is that we assume all the independent variables give no different influence to cross-listed firms and domestic-listed firms. This assumption can be violated under the circumstance that cross-listing changes the roles of the independent variables. In attempting to determine if this assumption changed our research results significantly, we re-estimate eq. (1), allow all the slope parameters interacting with dummy variables.
Another assumption is that the listing status of firms remains the same during the whole observing period, this assumption is violated if there are firms cross-listing during this period. If this is the case, our estimations can be inadequate, to handle this potential drawback, we estimate the cash holding ratios again, only observe the latest observing period.
Moreover, recall that WLS method are used in eq. (1), however in cross-section panel data, this method can be ineffective because it ignores the individual specific effects. To take individual specific effects into account, we employ cross-section random effects method and estimate eq (1). again.
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cause a severe skewed distribution to this variable. To detect whether this skewed distribution affect the effectiveness of our regression, we exclude observations with 0 dividend payment and re-estimate eq. (1). All the results of robustness checks are reported table 6.
Table 6. Robustness Rests
Changing slope parameters (1) Cross-section Random Effect (2) Exclude Div=0 (3) Single Period 2015 (4) variables Coefficient Coefficient Coefficient Coefficient Dummy (Cross-Listed) 0.150*** [17.11] 0.155*** [7.93] 0.21*** [54.82] 0.280*** [135.93] Dummy (US) 0.315*** [27.03] 0.066*** [1.74] 0.104*** [10.26] 0.084*** [23.48] Dummy (GER) 0.077*** [8.348] -0.104*** [4.15] -0.114*** [17.39] 0.155*** [43.22] Dummy (HK) 0.078*** [9.12] 0.107*** [4.5] 0.116*** [32.18] 0.205*** [49.74] Number of Obs* 28369 28369 14454 8562
Notes: This table reports the results of four robustness tests, a set of firm-specific variables we defined in earlier text are not reported in this table due to limited space, we provide the complete results in appendix. In column (1), we interact all slope parameters on the independent variables with the cross-listing dummy 𝐶𝑜𝑢𝑛𝑡𝑟𝑦𝐷𝑢𝑚𝑚𝑦𝑖. In column (2), we use cross-section random effect to estimates equations that we carried out in table 4. In column (3), we exclude observations who have 0 dividend payout ratios. In column (4), we only examine the latest observe period (2014-2015). Dummy (Cross-Listed) equals to 1 for firms cross-listing in other countries and 0 otherwise; Dummy (US), Dummy (GER) and Dummy (HK) equals to 1 for firms cross-listing in the US, Germany and Hong Kong
respectively, and otherwise 0. T-statistics are in brackets. *, ** and *** indicates statistical significant level at 10% 5% and 1% respectively.
In all four robustness tests, the cross-listing dummies demonstrate positive, which suggests that our main conclusions in section 4.2 remain robust. 10
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5 Conclusions and Limitations
Recent researches have shown that cross-listing in developed markets affects firms from emerging markets in many aspects. Specifically, cross-listing will bring different legal and accounting systems with greater transparency, higher institution quality and stronger investor rights protections. Previous empirical studies have provided evidence that specific amount of corporate cash holdings contribute less to firms’ value in countries with lower quality of financial institutions and financial markets. Moreover, firms from emerging markets cross-listing in a more developed market can be used as a bonding mechanism to higher quality financial markets and stronger investors’ rights protections. Based on these findings, we assume that cross-listing on developed markets will force firms to adapt higher investors rights protecting standards, and to improve their efficiency of funds allocating. Consequently, cross-listing will eventually reduce firms’ cash holding ratio. To test our prediction, we estimated cash holding ratios of Chinese firms who cross-listed in the US, Germany and Hong Kong as well as their domestic peers. Contrary to our expectation, the results show that cross-listing leads an increase in firms’ cash holdings. Therefore, we conclude that the negative correlation between financial markets’ quality and corporate cash holdings does not hold in the circumstance of cross-listing. Suggested by our findings, cross-listing firms hold more cash than their domestic competitors.
Our second hypothesis is firms cross-listing in different countries will also bring them different influences in regarding to their cash holdings, since the national level factors can be heterogeneity among distinct developed countries. This hypothesis is supported by our research findings. Our test results reveal that when Chinese firms cross-listing in the US, Germany and Hong Kong, the changes of their cash holding ratios demonstrate statistically different.
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37 / 40 Appendix A: Univariate Analyze
Wilcoxon Test of Variables
Domestic Listed Firms Cross Listed Firms
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Appendix B: Correlation Matrix of Variables
CASHRATIO SIZE MTBV CAEXP LEV DIV CASH
FLOW BUSRISK CASHRATIO SIZE -0.098 *** MTBV 0.062 *** -0.159 *** CAEXP -0.006 0.027 *** 0.073 *** LEV -0.263 *** 0.298 *** 0.037 *** 0.034 *** DIV 0.156 *** 0.242 *** -0.059 *** 0.034 *** -0.129 *** CASHFLOW 0.056 *** 0.231 *** 0.014 ** 0.103 *** -0.001 0.199 *** BUSRISK -0.073 *** -0.314 *** -0.005 -0.058 *** -0.039 *** -0.195 *** -0.649 ***
39 / 40 Appendix C:
Table 3. Changing all slope variables regression
