Government control and the value of cash: evidence from listed firms in China
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Government control and the value of cash: evidence from listed firms in China Xinyu Yu1 · Ping Wang2
© The Author(s) 2020
Abstract In this paper, we investigate the impact of government control on investors’ valuation of cash held by listed firms in China. We find strong and robust evidence that government control leads to a lower value of cash. Further evidence suggests that this negative impact is associated with significant agency costs of political expropriation rather than low financial constraints of the soft-budget effect. Moreover, our extended analyses reveal that the negative impact of government control on the value of cash depends on regional institutional development. In particular, in regions with high institutional development, government control reduces the value of cash, while in areas that are less developed, this negative impact is attenuated to some extent. Overall, our findings shed new light and add a further dimension to the literature, broadening our understanding of the impact of government intervention on the listed firms under its control. Keywords Government control · Value of cash · Political expropriation · China JEL Classification G30 · G32 · G34
1 Introduction Despite the large wave of privatization that started in the United Kingdom in the 1980s and then spread across the globe during the 1990s, government control over listed firms is still pervasive, especially in the emerging markets in general and the Chinese market in particular (Boubakri et al. 2018). The recent financial crisis, associated with worldwide government intervention, has provoked the debate over government involvement in firms’ business decisions, and two competing views emerge. On the one hand, government control can be detrimental to firm value due to its social and political motives, which can lead to inefficiencies (Boycko et al. 1996; Shleifer and Vishny 1997). On the other hand, government connections may bring benefits to firms under its control by providing them with rents and protection such as implicit bailout guarantee, preferential access to credit and * Ping Wang [email protected] 1
Keele Business School, Keele University, Keele, Staffordshire, UK
2
Birmingham Business School, University of Birmingham, Birmingham, UK
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government-related contracts (Kornai et al. 2003; Borisova et al. 2015). Given the theoretical benefits and costs of government intervention, there is significant conflicting evidence in the literature on the relationship between government control and firm value (Boubakri et al. 2005; Chen et al. 2009; Liu et al. 2012; Beuselinck et al. 2017; Boubakri et al. 2018). In this study, we aim to add to this debate by investigating how government control influences firm value through its impact on cash held by firms within the context of China, the world’s largest emerging economy. We are particularly interested in China as it offers a suitable setting for studying this topic. China is characterized by government control as the majority of
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