Monetary policy, cash holding and corporate investment: Evidence from China

Abstract

This paper uses 13,766 firm-year observations between 2003 and 2013 from China to investigate the effects of monetary policy on corporate investment and the mitigating effects of cash holding. We find that tightening monetary policy reduces corporate investment while cash holdings mitigate such adverse effects. The cash mitigating role is especially significant for financially constrained firms, non-state-owned enterprises (non-SOEs) and those firms located in a less developed financial market. Cash holding also improves investment efficiency when monetary policy is tightening and tightening monetary policy enhances the 'cash-cash flow' sensitivity. Our empirical evidence calls for a critical evaluation on the monetary policies implemented in China which are less effective for state-owned enterprises. It also calls for a necessity for local government to further develop regional financial markets to protect vulnerable businesses, such as non-SOEs and financially constrained firms, from external shocks in order to maintain their sustainable growth and competitive advantages.

Loose Monetary Policy and Corporate Investment of Manufacturing Firms in the Czech Republic

“…In other words, more liquid firms are less active in investment activities. This finding was amended by Yang et al (2017), who found that more cash increases corporate invest-ment and mitigates the adverse effects of tightening monetary policy on investment. Our findings uncover that a higher level of cash is irrelevant during the period of loose monetary policy and might limit the investment operation of firms.…”

“…They found that corporate investment adjustment is faster when monetary policy loosens in comparison to tightened monetary policy. Yang et al (2017) investigated the effects of monetary policy on corporate investment and cash holdings for Chinese firms during the period from 2003 to 2013. They concluded that a tightening monetary policy decreases corporate investment and that the mitigating effect depends on financial constraints, ownership and also if the firm is located in a less developed financial market.…”

Monetary Loosening and Dividend Policy: Evidence from Vietnamese Stock Market

“…OMT t is assigned 1 if firms pay dividend in year t-1 but fail to pay dividend in year t. MGR t-1 is the growth rate of money supply M2 in year t-1. We use the first lag of M2 growth rate since one year is a common lag in effect of monetary policy in prior studies (Bhattacharya, 2014;Yang et al, 2017). The coefficient β 1 is expected to be positive.…”

“…Among four major transmission channels of monetary policy, credit channel is the most effective mechanism to explain how monetary policy affects corporate financial decisions in an emerging market due to its under-developed and bankbased financial system (Mengesha & Holmes, 2013;Yang et al, 2017). Credit transmission channel includes bank lending mechanism and broad credit mechanism.…”

“…First, we use both logit and tobit models to investigate the effect of monetary loosening on the propensity to pay dividends and dividend payout ratio respectively. In addition, Yang et al (2017) find that cash holdings are able to mitigate the effect of monetary policy on firm investment; therefore, we also insert an interactive term between money supply growth and cash holdings into these logit and tobit regression models to examine how corporate liquidity influences the relationship between loosening monetary policy and dividend decisions. Second, following Pandey and Bhat (2007), we develop a dynamic model to analyse how money supply growth affects the speed of dividend adjustment.…”