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The Impact of Deviation from Expected Cash Level on Corporate Performance

Author: HuangZheng
Tutor: ZhangWenZhong
School: Northeast Normal University
Course: Accounting
Keywords: Cash holdings Deviation from expected cash balance Corporate future performance
CLC: F275
Type: Master's thesis
Year: 2011
Downloads: 56
Quote: 0
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Abstract


Holding a certain amount of cash is an important financial decisions to an enterprise. But how many cash is appropriate? What factors and how do them affect cash holdings? According to many relative literatures, I extracted 14 indices which reflect the characters of corporate financial and governance as the influence factors. Then I constructed empirical model 1 of determinants of cash holdings . In the analysis process, I choose the Chinese A-share listed company of manufacturing industry form 2005 to 2009 as samples. The resulting estimates show that 9 out 14 indices markedly influence corporate cash holdings.Then I constructed model 2 to calculate the expected cash balance through those 9 indices. Through comparing actual cash holdings with expected cash balance, I found that there is a distance between them of most corporations. This distance is defined as deviation from expected cash balance, which is the absolute value of residuals from model 2. What effects does the deviation to corporate future performance? So I constructed model 3 to verify the relations between them. To avoid the limitation of single index, I choose 13 financial indices and apply factor analysis to analyze the corporate future performance. The resulting estimates show that deviation from expected cash balance markedly reduces corporate future performance.Model 3 show that both excess and deficit in cash (relative to expected level) can reduce corporate future performance, but the effects are not necessarily symmetric. Which one has a greater effect? To address this question , I constructed model 4 and 5. The result show the different effects of positive deviation and negative deviation on future performance. The positive (negative) deviation is the absolute value of positive (negative) residuals from model 3. The resulting estimates show that the effect of negative deviation from expected cash balance on future performance is stronger than that of positive deviation.

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CLC: > Economic > Economic planning and management > Enterprise economy > Corporate Financial Management
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