Corporate cash holdings and firm life cycle: evidence from China

Abstract

Purpose The purpose of this paper is to investigate how corporate cash holdings changes across firm life cycle and how firms undergo heterogeneous dynamic cash adjustment as they advance from one stage to the next stage. Design/methodology/approach This study uses an extensive data set of 2,994 Chinese A-listed firms. The authors use generalized method of moments (GMM) and Fisher Panel unit root testing to investigate the targeting behavior of Chinese firms. Findings The uni-variate investigation reveals that firms in the growth stage exhibits the highest cash levels and firms in the decline stage report the lowest cash levels. As growth firms have high investment needs, they may require raising external capital to meet investment needs. To avoid the costly external financing, firms in growth stage tend to hold more cash. The GMM estimation reveals that along all the phases of firm life cycle there are evidences of trade-off behavior of corporate cash holdings. The authors report that adjustment rate increases as firms enters into the growth stage. Practical implications The findings provide both theoretical and practical insight to align cash policies with the available strategic choices along firm life cycle in an emerging market characterized by market imperfections. Originality/value The study is unique from the context that it is applying robust methodology to one of rarely investigated area in corporate cash policy. The peculiar Chinese study setting characterized by higher information asymmetry, high cost of external financing and heterogeneous access to financing sources provide theoretical and empirical underpinnings to investigate and gain insight about how corporate cash policy can be aligned with strategic choices available across different stages of life cycle.

The Moderator Effect of Institutional Ownership on the Relationship between Cash Holdings of Life-Cycle Stages: Evidence from Borsa Istanbul

“…Chireka (2020) did not find any relationship between life cycle stages and cash holding behavior in South Africa. Contrary to our findings, Rehman et al (2021) claim that the lowest cash levels occur in the decline stage in the Chinese sample. Alzoubi (2019) also report a similar result from Jordan's Amman Stock Exchange.…”

“…This study's findings suggest that companies' cash holding policies do not depend on the life cycle stages. Rehman et al (2021) tested a sample of Chinese listed companies to examine the change of cash holdings across the life cycle stages. Results highlight that the highest (lowest) cash levels are observed in companies in the growth (decline) stages.…”

“…Thus, we expect that cash holdings are significantly linked to the life cycle stages. The literature on the effect of the life cycle on cash holdings is rare and presents mixed results for a very limited number of countries (Alzoubi, 2019;Chireka, 2020;Rehman et al, 2021). Therefore, in this study, we aim to fill this gap and test the effect of the life cycle on cash holding in Turkey, one of the most important emerging markets.…”

Pengaruh Daur Hidup Perusahaan Terhadap Cash Holding Pada Perusahaan Manufaktur Yang Terdaftar Di Bursa Efek Indonesia

“…Penelitian ini dilakukan untuk mengkaji ulang pengaruh daur hidup perusahaan terhadap cash holding yang diteliti oleh Rehman et al, (2021) yang menemukan adanya pengaruh daur hidup perusahaan terhadap cash holding. Penelitian ini bertujuan untuk menguji dan menganalisis pengaruh daur hidup perusahaan yang terdiri dari introduction (I), growth (G), dan maturity (M) serta variabel seperti capital expenditure (CAPEX), net working capital (NWC), firm size (FS), leverage (LEV), firm value (TOBQ) dan dividend payment (DIVD) terhadap cash holding (CH).…”

“…Sumber pendanaan utama pada tahap introduction berasal dari dalam perusahaan oleh karenanya dibutuhkan kas dalam jumlah cukup banyak yang disimpan. Hasil penelitian ini mendukung penelitian Rehman et al, (2021) dan Alzoubi (2019).…”