Political extraction and corporate cash holdings in China

Abstract

This study investigates how political extraction influences corporate cash holdings in China. Using data for Chinese listed firms between 2003 and 2013, we find that firms headquartered in regions with higher levels of political extraction hold less cash, and the negative effect of political extraction is more significant in more corrupt regions. We also find that the negative relationship between political extraction and cash holdings is more prominent in firms without political ties than those with political ties. Further analysis shows that firms reduce cash holdings by channelling cash into hard assets such as property, plant and equipment. Overall, our study indicates that firms can protect themselves from political extraction by sheltering cash or building political ties. This study also identifies the importance of the anti-corruption campaign in China.