National Culture and Corporate Cash Holdings: Evidence from China

Abstract

This article identifies national culture as an important factor affecting corporate cash holdings by using China and its national culture, Confucianism, as a setting. We find that firms located in regions with higher levels of Confucian culture hold higher levels of cash and this high cash holdings status is also more persistent. Next, we employ an instrumental variable to establish causal identification of the culture effect and the IV estimates show a compelling economic magnitude. The culture effect is stronger for more financially-constrained and riskier firms, suggesting precautionary motives as the underlying mechanism. Besides, we find that the culture effect remains intact after controlling for corporate governance heterogeneity, which rules out the agency motives. Further, we find that higher Confucian culture firms make better investment decisions, have higher acquisition announcement returns, pay out more dividends and achieve higher profitability and lower profit volatility. These all are additional evidence arguing against agency motives, but supporting an efficient outcome argument. Finally, we also show that the CEO/board chairman’s Confucian background and the firm’s headquarter cultural environment together exert an influence.