Government control and the value of cash: evidence from listed firms in China

Abstract

In this paper, we investigate the impact of government control on investors' valuation of cash held by listed firms in China. We find strong and robust evidence that government control leads to a lower value of cash. Further evidence suggests that this negative impact is associated with significant agency costs of political expropriation rather than low financial constraints of the soft-budget effect. Moreover, our extended analyses reveal that the negative impact of government control on the value of cash depends on regional institutional development. In particular, in regions with high institutional development, government control reduces the value of cash, while in areas that are less developed, this negative impact is attenuated to some extent. Overall, our findings shed new light and add a further dimension to the literature, broadening our understanding of the impact of government intervention on the listed firms under its control.

The Influence of Government Shareholding on Dividend Policy in Malaysia

“…Similarly, companies with weaker management may have reduced internal resources to curtail the "grabbing hand" of informal nonshareholding political connections. This would heighten demand for government-related shareholders to do so via demanding higher dividends (Benjamin et al 2016;Boubakri et al 2020;Yu and Wang 2020).…”

“…Hence, the negative association between capital expenditure adjustment and the existence of a longstanding, informal political connection appears to be driven by companies with low corporate governance quality. This may partially reflect the presence of a "grabbing hand" effect in Malaysia (i.e., the informal political connection may expropriate corporate resources, leaving a diminished resource base available, for appropriation of dividends (Boubakri et al 2020;Yu and Wang 2020)). "Grabbing hand" mechanisms, in Malaysia, may be facilitated by regulators being partially "captured" by powerful businessmen and politicians (Vithiatharan and Gomez 2014).…”

“…In cases where Fitted GovSh i,t was negative, we set this variable to zero. Equation ( 1) is similar to a model estimated in Yu and Wang (2020) to capture the effect of the government choosing to invest in companies because of corporate fundamentals.…”

“…These are advisers who guide the company to developing its business model, to be favourable to the government's policies for economic and social development (Fraser et al 2006). Consistent with the "grabbing hand" theory (Yu and Wang 2020), the political connection may concede to accepting lower payout to compensate for shareholder wealth expropriation. Benjamin et al (2016) provide evidence consistent with this mechanism.…”

“Empirical Corporate Finance: Opportunities and Challenges”—Editorial Synthesis of the Special Issue

“…Another challenge and opportunity for future empirical research, emanating from the papers, is to embrace and contribute to new theories and streams in the literature. These paradigms include the literature on managerial overinvestment (Biddle et al 2009), the literature on the shareholder wealth effects of government investment in private sector entities (Boycko et al 1996;Wang and Shailer 2018;Boubakri et al 2020;Yu and Wang 2020) and the capital markets literature on unlisted companies (Li et al 2013;Ali et al 2014).…”