An Empirical Study of the Impact of Excess Cash Holdings on Enterprise Value for Nordic and Chinese Listed Companies

Abstract: Cash holding strategy is an important financial decision for firms. It is highly related to firms’ operation and development because cash is an important guarantee to meet the business payment and investment opportunity. However, some scholars believe that due to agency problems, too much cash holdings are likely to produce negative impact on enterprise value. Compared to listed firms on Chinese A-share market, listed firms on NASDAQ OMX Nordic are subject to more mature governance and more stringent regulatory law and disclosure requirements. Therefore, the impact of excess cash holdings on enterprise value should have some difference between China and Nordic countries. This paper takes excess cash holdings as research object and selects the period from 2009 to 2013 as the estimation window. Then, this paper adopts Opler (1999) improved model about the influencing factors of cash holdings so as to derive excess cash holdings and then uses the revised Fama and French (1998) model to implement empirical test about the impact of excess cash holdings on enterprise value. This paper’s research results are as follow: (1) For both the listed firms on Chinese A-share market and the listed firms on NASDAQ OMX Nordic, companies’ excess cash holdings have a negative impact on enterprise value. Because positive excess cash holdings are a kind of irrational allocation of assets for firms and the evidence of agency problem, management tends to use this part of cash in low efficiency areas and self-interest behaviors, which causes negative impact on enterprise value. (2) Compared to the listed firms’ excess cash holdings on Chinese A-share market, the impact of excess cash holdings on enterprise value is less negative for listed firms on NASDAQ OMX Nordic. This is because listed firms on NASDAQ OMX Nordic are subject to more mature governance and stricter regulatory law and disclosure requirements, agency problems are alleviated and investor protection level is enhanced.