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State ownership, soft-budget constraints, and cash holdings- Evidence from China’s privatized firms.pdf

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Journal of Banking Finance 48 (2014) 276–291 Contents lists available at ScienceDirect Journal of Banking Finance journal homepage: /locate/jbf State ownership, soft-budget constraints, and cash holdings: Evidence from China’s privatized ?rms q William L. Megginson a,b,?, Barkat Ullah c,1, Zuobao Wei c,2 a Price College of Business, The University of Oklahoma, 307 West Brooks, 205A Adams Hall, Norman, OK 73019-4005, United States b King Fahd University of Petroleum Minerals, Dhahran, Saudi Arabia c College of Business Administration, University of Texas at El Paso, El Paso, TX 79968, United States article info Article history: Received 22 June 2013 Accepted 13 June 2014 Available online 8 July 2014 JEL classi?cation: G32 G34 G38 Keywords: Privatization State ownership Soft-budget constraints Cash holdings China abstract We study the relation between state ownership and cash holdings in China’s share-issue privatized ?rms from 2000 to 2012. We ?nd that the level of cash holdings increases as state ownership declines. For the average ?rm in our sample, a 10 percentage-point decline in state ownership leads to an increase of about RMB 55 million in cash holdings. This negative relation can be attributable to the soft-budget constraint (SBC) inherent in state ownership. The Chinese ?nancial system is dominated by the state-owned banks, an environment very conducive for the SBC effect. We further examine and quantify the effect of state ownership on the value of cash and ?nd that the marginal value of cash increases as state ownership declines. The next RMB added to cash reserves of the average ?rm is valued at RMB 0.96 by the market. The marginal value of cash in ?rms with zero state ownership is RMB 0.36 higher than in ?rms with majority state ownership. The SBC effect exacerbates agency problems inherent in state-controlled enterprises, contributing to their lower value of cash. ó 2014 Elsevier B.V. All rights reserved. 1. Introduction The ef?cient management of li