CHINA’S HIGH CASH HOLDINGS PUZZLE: SOME PERSPECTIVES

Abstract

China listed firms exhibit a high cash holdings puzzle in the period between 1999 and 2012, drawing parallels to a similar occurence in the US. This paper attempts to explain the high cash holdings puzzle by modelling it as a quadratic convexity phenomenon. We find that the puzzle is differentiated by firm size, with the smaller firms displaying a larger increment and earlier turning point in the evolution of their cash holdings. The puzzle is also heavily affected by positive autocorrelation, for which greater convexity is exhibited after taking into account the first lagged value of the log cash-to-asset ratio. GDP growth and the Renminbi exchange rate are negatively related to cash holdings, but do not completely explain the puzzle. The better explanatory factors are IPO volume and business climate which relate positively to cash holdings and explain a large extent of the puzzle, albeit incompletely. This paper adopts returns volatility and non-systematic risk as proxies for information asymmetry. We find that information asymmetry relates negatively to dividends payout and cash holdings, and does not completely explain the cash puzzle.