Does Culture Matter in Corporate Cash Holdings?

Abstract

This paper identifies culture as an important factor affecting corporate cash holdings by using China and its national culture, Confucianism, as the setting. We find that firms located in regions with stronger levels of Confucian culture hold persistently higher levels of cash. We employ an instrumental variable to establish causality of the culture effect. 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. Lastly, firms’ operating performance indicates that higher levels of cash holdings is an efficient outcome.