Institutional development, state ownership, and corporate cash holdings : Evidence from China

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Original languageEnglish
Pages (from-to)351-359
Journal / PublicationJournal of Business Research
Issue number2
Online published15 Jul 2014
Publication statusPublished - Feb 2015


This study examines how institutional development and state ownership influence corporate cash holdings among Chinese firms. The empirical results reveal that firms in provinces with more developed institutions (non-state-controlled firms) hold more (less) cash reserves than those in provinces with less developed institutions (state-controlled firms). Moreover, the positive effect between institutional development and cash holdings is more prominent for non-state-controlled firms. These findings are consistent with the hypothesis that more developed institutions mitigate the threat of political extraction for non-state-controlled firms, resulting in larger cash holdings among these firms. Subsequent analyses demonstrate that the impact of institutional development on cash holdings is weakened for non-state-controlled firms which have established political connections. Therefore, this study identifies one vital channel through which political connections are beneficial for non-state-controlled firms in terms of mitigating the threat of political extraction.

Research Area(s)

  • Cash holdings, Institutional development, Political connections, State ownership