Empirical research on the interactive relationship between cash holdings and corporate performance of listed companies in China

Abstract

This paper investigates the interactive relationship between cash holdings and corporate performance. Based on the empirical research results, this paper also aims to analyze the ideal cash holdings. The paper establishes the regression equation of corporate performance influencing cash holdings and the regression equation of cash holdings influencing corporate performance with both single-equation model and simultaneous-equations model. The research dataset consists of the financial information of the Chinese A-share manufacturing listing companies from 2007 to 2009 considering the influence of financial characteristics and corporate governance on cash holdings and corporate performance. During the research, we eliminate variables with stepwise regression analysis. We find that there is a positive interactive relationship between cash holdings and corporate performance. The improvement of corporate performance increases cash holdings. Finally, we put forward the calculation of ideal cash holdings. The paper proves that cash holdings and corporate performance interact in a very complex way by using three-stage least squares innovatively. Furthermore, the calculation of ideal cash holdings is of great significance to improve corporate performance in China.