SOAS Research Online

Abstract

Using a panel of 1478 Chinese listed firms over the period 1998–2010, we examine the behavior of corporate cash holdings. Consistent with the trade-off theory, we document that Chinese firms tend to actively manage their cash balances toward a target level. We also observe a considerable heterogeneity in adjustment speeds of cash holdings across firms, due to the presence of different adjustment costs. Specifically, firms with a high level of excess cash, and firms that actively manage their cash balances through investment, dividend payments, and debt issuance, all display higher adjustment speeds. Finally, the institutional setting does not significantly affect adjustment speeds.