Discussion of listed companies cash holdings from a macroeconomic perspective

Abstract：Cash holdings represent financial flexibility and development potential of an enterprise and it is related to the survival of business. If the cash holdings cannot support daily operations， corporate financial risk will occur， but the high cash holdings also have adverse impact on the corporate and influence the utilization of funds. Enterprises lack vitality is not conducive for long-term development of listed companies. So it is very important to research the Listed company's cash holdings which is helpful for companies to make the right decisions.

Key words：Cash holdings； Listed companies； Macroeconomic

1. Introduction

For a listed company， cash holdings represent an enterprise financial flexibility and potential for development， it is also related to the survival of the company. If cash holdings are unable to support the daily operation， the enterprise financial risk will occur， but hold high cash holdings which influence utilization rate of the funds and make the the enterprises lack of vitality that it is unfavorable to the company and be no good to the long-term development of the listed company. So it is very important to study the cash holdings of the listed company which is benificial for the enterprise to make the right decision. Recently， the impact of the macroeconomic environment on the listed company's cash holdings has also begun to draw the scholar's attention， they have began to explore the macroeconomic factors that have a significant impact on the amount of funds held by the listed companies.

So cash is a fairly large asset of a enterprise. The determinants of cash holdings are worth investigating because cash holding costs. Companies may hold cash to deal with future emergencies， but at the same time， they may not invest in profitable projects with positive net present value. Therefore， a high level of cash may indicate the agency problem between the company's management and shareholders. Another important cost of holding cash is the opportunity cost， a certain cash should be maintained if the company has a project with transaction profits. Institutional factors are cognition， specification and the regulatory of structures that may affect the company's financial practices， such as cash holdings. In developed markets such as the United States， which may raise the level of uncertainty in the transaction， thereby encouraging a range of non productive practices such as cash retention. In addition， the slow development of institutions： the stock market， banks and other financial institutions can encourage companies to take conservative financial practices.

2. Cash holdings model from the perspective of macro economy

（1） Trade-off theory model

According to the trade-off theory， the enterprise maximizes its value by considering the marginal cost and the marginal revenue of the cash holdings. Assuming the manager's goal is to maximize shareholder wealth， holding cash will bear the cost of holding. This cost is related to the difference between the profit of holding cash and the interest paid by the company. The benefits of holding cash are based on 2 motives： transaction minimization and motivation prevention. In the former related， the rising costs and opportunity costs （cash deficit correlation） of corporate cash reserves are higher. On the basis of precautionary motives， the impact of asymmetric information to raise funds shows that even if the enterprise raise funds in the capital market， they may be reluctant to do this because of the market problems： for example， if the market issued securities as planned. Enterprises raise funds when the cost of external financing is significantly higher and more funds will be invested in this kind of investment. The marginal cost of cash shortage is proportional to the optimal level of cash shortage. Holdings cash is a reduction of financial distress probability due to unexpected losses.These companies’ stock cash level is in a better position， it is difficult to obtain funds to invest directly with plans. The market flaw is more severe. Compared with emerging markets， the costs of developed market and bankruptcy related are significant. The trade-off theory can explain the cash holding decisions of these markets. Emerging market background supports this argument. There are different agents which are finacial decicive fators of holding cash. Empirical research is carried out to reflect the theory. Empirically investigated from the perspective of cash balance theory make use of leverage， dividend policy， company size， risk and asset liquidity. this theory is empirical tested with the use of liquidity， leverage， growth and size.

（2） Sequence Theory

According to this theory， there is no optimal level of cash holdings for a listed company. Companies follow the minimization of pecking financing costs. Insiders revealed that the company will use external resources whend the internal resource has been exhausted. Compared to the company's favorable external funding debt， equity issuance， because of its information cost is lower than equity financing debt. Cash can be seen as a result of different financing and investment decisions， which are presented through a financing model. Cash can be used to pay the company's debt financing investment in turn reserve cash. It is also found that high levels of cash flow are those that distribute dividends， apply debt financing， and act as a result of hoarding cash. Based on previous literature， we think that information asymmetry is very important， and may be more serious in developing countries. Different financial factors， as the determinants of cash holdings， have been used in empirical studies to reflect this theory. Recently， the decision of leverage and profitability and other financial variables is used to hold cash. Generally speaking， there is no preference in the financial literature， which can explain the factors influencing the cash holdings， and therefore there is no hoarding cash of optimal theory with optimal decision factors.

（3） Empirical Analysis

Many studies have focused on the empirical analysis of cash holdings， and they have selected some country's data， including macroeconomic factors to establish a suitable model to evaluate the cash holdings of listed companies. The aim of Ramirez and Ted （2009） was to develop a cross sectional time series model that， using survey data from 49 countries to study the extent of the state's macro environmental impact on cash holdings. Through the implementation of the uncertainty avoidance concept with macroeconomic elements and the capture of the organizational elements/ institutional settings and the basic social attitudes. They found that this uncertainty avoidance variable had a significant effect. However， Ramirez did not consider the dividend policy in its model. In addition to the determinants of cash holdings， other researchers have investigated the relationship between cash holdings and enterprise value. There is a relation of concave function between cash holdings and enterprise value. Compared the investor protection with the strengthening of protecting the country， there is a weak relationship between the cash holding and enterprise value. The importance of controlling is studied with the sample of U.S Multi-National Corporation. High cash levels in the context of tax. Their findings indicate that a high level of repatriation tax increases their cash reserves of companies. The survey analyzes cash holdings in different countries， including Japan， France， Germany and the United States. They demonstrated that companies with strong shareholder protection are in a better position to maintain a lower level of cash. They pointed out the negative correlation between ownership concentration and cash holdings. The evidence shows that three is a relation between the cash holdings and the macroeconomic environment of developing countries. In some extent， there is a gap between both developed and developing countries. Different reasons exist behind these differences： for example， the number of enterprises in different countries are different and there are also different setting of institutions. If we know the company's nationality， we know the determinants of cash holdings. Cash holding decides specific factors （such as dividend decisions） of relevant different industries and enterprises. Therefore， the company's specific variable inclusion will lead to lower national security impact. Similarly， it can be considered that the results of these differences are related to the structural or institutional aspects， including access to financial institutions' capital or the ability to access capital markets. In this case， the financial factors should be different and remain significant.

3. Influencing factors of cash holdings from the perspective of macro economy

（1） The leverage

Leveraged firms are more likely to hoard cash because of the higher probability of financial distress. It is suggested to carry down the cash level of more debt. Therefore， the company with more liquid assets can have hidden cash and maintain a lower level of cash. There is a link between negative leverage and cash holdings. The cost of bankruptcy under the macroeconomic environment is also very important. Enterprise with high debt levels is not able to reserve cash. This is because they have better monitoring， if compared to the relatively low debt of the company. Therefore， there is a negative correlation between dividend and cash holdings in the macroeconomic perspective.

（2） profitability

Based on the hierarchical model of financing， cash is the product of financing and investment activities. As a result， profitable companies are more capable to pay dividends， debts and store cash. Less profitable companies will hold less cash and issue debt to finance their projects. These companies do not want to issue shares because of the high cost. Low cash flow listed coompany use their own cash and issue bonds to have finance investment， but they do not issue stock because it is too expensive. Therefore， there is a positive correlation between the profitability of the company and the cash holdings.

（3） The liquidity

The cost of converting liquid assets into cash is expected to be far lower than other assets. As a result， there are more liquid assets， the companies can hide the cash and are less likely to hoard cash. It is not reliable to obtain cash in the capital market for the company led by the existence of liquid assets. Based on the trade-off theory， it is considered that the current assets can be easily liquidated in the event of a cash shortage， and therefore they are an alternative to cash. According to the trade-off theory， there is a negative correlation between liquidity and cash holdings.

（4） The enterprise size

Due to the high cost of external funds， small enterprises hold more cash than large enterprises. Enterprises are thought to be more diversified than its smaller peers， and less likely to go bankrupt， so it is unlikely to hoard cash reserves. The same can be said that large enterprises reduce information asymmetry （if relatively small companies will increase information asymmetry）， so the enterprises will hold more cash under the financial policies and have better flexibility， the enterprise size is a proxy for information asymmetry， which reflects negative relationship between the external financing and cash holdings can be expected. However， if the enterprise size is regarded as an indicator of the financial crisis， then smaller companies are more likely to be liquidated if they suffer from financial distress. So the company has more cash in order to avoid the embarrassment. Therefore， we believe that the size of enterprises is an important factor affecting the amount of cash holdings.

（5） The measurement of the macro-economy

The impact of macro economy on the cash holdings of listed companies should be studied with a selection of certain indexes. These variables can reflect the operation of the national economy and can be easily got. So the GDP， industrial added value， and economic cycle can be chosen. For the economic cycle， it is reflected in the gross national product， employment and output and other related indicators， which reflect the overall trend of the country's economy. Fiscal policy， tax rates and monetary policy reflect the current fiscal policy of the country. We choose these variables to study the impact of the macro economy on the holdings of listed companies， in general， a proper amount of indicators can be selected according to the different specific business for study.

（6） The economic level of the National Region

Cash holdings is an important strategy of listing Corporation. Emerging markets have a certain impact on cash holdings， particularly in developing countries. Macroeconomic in developing countries is not the same as the developed countries.

Different types of enterprises in different countries have different cash holdings. Under the international background， holding cash is decided by the country's macroeconomic environment. Leverage， dividend payments， liquidity， profitability and firm size will affect cash holdings in either developed countries or emerging market companies. This is because these countries have different institutional settings. In the study of cash holdings， research methods will be different as the country is different. In the long run， the national system， institutions， economic measures result in the difference of the overall macroeconomic environment.

The general financial theory is applicable to the research of cash holdings in the international background. In particular， leverage， dividend and enterprise size are considered to be important finanical determinant of cash holdings. Industrial and institutional settings are the main reasons of the decision-making differences in cash holdings. To further explore this issue， in the context of emerging markets， the company operates hold more cash in a country with low shareholder protection. One reason is that the capital markets in these countries are weak. Overall， we provide further evidence， trade-off theory， pecking order theory and agency cost theory are important in understanding financial decisions， such as the important role of cash holdings in developing countries.The main factors of cash holdings are similar in emerging markets and developed countries. In particular， leverage， dividend payments， profitability， asset liquidity， and the impact of enterprise size on cash holdings.From an international perspective， this study has an important implication， as it suggests that even though emerging markets differ in financial and governance structures， they have the same financial determinants. Thus， companies in such countries follow similar patterns in managing their cash holdings. Investigating internal corporate governance factors that may affect financial decisions and make further discussion on the space of cash holdings of enteerprises in developing countries. The characteristics of the board of directors， the audit function， and the chief executive officer are required to investigate.

（7） The factors of industry and enterprise

The factors between enterprises and in the industry also have an impact on the cash holdings of listing company， a company and its opponent has interdependent investment opportunities. At the level of inter industry， it is expected that when this interdependence is more prominent， the industry concentration would be higher. In the industry level， we expect this interdependence is greater， when a company uses technology similar to the competitors or their growth opportunities， through different and competitors of the time. Therefore， our assumptions on result provide a empirical prediction， if a company is in a more concentrated industry and use the uses technology similar to the competitors， or if it increases the time for the competitors， the company is inclined to use derivatives or hold the largest cash balance. We note that although the impact of industry concentration and common technology may be separated， these effects may be correlative. For example， industrial concentration can magnify the impact of general technology on companies tendency to hedge. However， it may also be the case that if companies in more concentrated industries have a more uniform technology， the possibility of a company hedge in such an industry is affected by the common technology. Finally， as previously noted， when firms have similar internal capital positions， they are less likely to hedge. This leads to a testable hypothesis that in the product market， there is an alternative to the use of cash holdings and derivatives.

4. Conclusion

It is very important to study the cash holdings of listing company and it is good for the enterprise to make the right decision. Recently， the impact of the macroeconomic environment for the listing company 's cash holdings has also begun to draw the scholar's attention. They began to explore what macroeconomic factors have a significant impact on the amount of funds held by the listing company. An overview of cash holdings models such as trade-off theory model from the perspective of macroeconomics is provided in this paper. The company maximize its value by taking into account the marginal cost of the marginal revenue of the company's cash holdings. Assuming the manager's goal is to maximize shareholder wealth， holding cash will bear the cost of holding. Sequence theory： this theory holds that there is no optimal level of cash holdings for a listed company. Some scholars still use the method of empirical analysis to study the impact of corporate cash holdings in different countries， the country's macro economy is also included in the system. The paper analyzes the factors that influence the cash holdings of listing companies in China， including the financial leverage， the company is more likely to hoard cash because of the higher financial distress probability. It is suggested that more debt levels of cash fall. Profitability is based on a hierarchical model of financing and cash is the product of financing and investment activities. As a result， profitable companies are more able to pay dividends， pay their debts， and store cash. The liquidity， which is expected to be converted to cash， is much lower than the cost of other assets. As a result， there are more liquid assets， the companies can hide the assets of cash and may likely to hoard cash. Enterprise scale， due to the high cost of external funds， small businesses hold more cash than large enterprises. Firms are thought to be more diversified and less likely to go bankrupt than their own small peers， so it is unlikely to hoard cash reserves. Macroeconomic measurement， macroeconomic impact on the listed companies’ cash holdings， a certain indexes should be selected to study. These variables can reflect the operation of the national economy， and are also easily got such as the GDP， industrial added value， economic cycle， etc.. The economic level of the country's region， cash holdings is an important strategy of listed company. Emerging markets have a certain impact on cash holdings， particularly in developing countries. Factors including industry and enterprise factors， inter enterprise and intra industry have an impact on the amount of cash holdings of listed company， a company and rival companies have interdependent investment opportunities. The level between different industries， it is expected that this the industry concentration is higher when the interdependence is more prominent.