Cash Holding Case Study

I. Introduction

1.1 Research background

Cash flow plays an essential role in the producing and management of corporations. An optimal cash holding level represents the management and decision-making capacity of a corporation. Cash holding level is also the key point of financial management. When facing an uncertain external environment and system, cash holding level will be more concerned by managers.

In the end of 1990s, the phenomenon of high level cash holding in the firms such as Chrysler Group, General Motos, IBM, etc, caused the academic world a wide concern and research of the issue of cash holding (Opler et al, 1999; Dittmar et al, 2003; Kalcheva and Lins, 2007; Bates et al, 2009). In 2012, Apple Inc has a cash holding of about 100

Duchin (2010) estimated that the total cash holdings in the non-financial listed corporations in US stock market was worthy of 1.7 trillion US Dollars in the year of 2006, which occupied 9.2% of the market value of all those corporations. Bates et al (2009) researched the corporations in the manufactory industry listed in US stock market. Their cash holding level increased from 10.50% to 23.20% during the years of 1980 to 2006. In the study of Dittmar (2003), Ozkan (2004), and Nicolas (2005), the average cash holding level was 16.20% in Germany, 9.91% in UK, 10.20% in Japan, 8.93% in South Korea. After the sub-prime crisis, corporations from around the world realized that large cash holdings could protect the corporations from financial distress in the financial crisis in 2008. Since then, more corporations made efforts to maintain the cash flow by raising the cash holding level and current assets. Compared to foreign corporations, Chinese listed companies have even higher cash holding level. The cash holding level was 18.4% in the year 2000 to 2005, and was 22.4% in the year from 2004 to 2010 (YANG Xingquan, 2007; WANG Shengfu,

The information asymmetry causes high financing cost. And high cash holding prevent the corporation from the financing constrains which raise the value of cash holding. The agency cost makes the current asset easier to be expropriated by controlling shareholders and managers. From this point of view, high cash holding level decreases the value of cash holdings. Compared to the studies of cash holding in the world, the researches of Chinese academic started later, and the results of studies are not completely consistent with previous studies in the west. Meanwhile, the corporations lack scientific management for cash holdings. Chinese economy is under the process of transformation, the information asymmetry and agency cost problem both exist in Chinese market. In this condition, whether the cash holding raises the value of cash or decreases the value of cash need further