فساد محلی و نگهداشت دارایی های نقدی شرکت های بزرگ : دارایی های مخفی یا درگیری های سازمان؟ Local corruption and corporate cash holdings: Sheltering assets or agency conflict?

1. Introduction Corruption has always been an eye-catching issue in both emerging economics and developed countries. Corruption damages market institutions and business systems and is considered ‘‘the biggest obstacle of economic and social development” (World Bank, 2000). A report from the World Economic Forum in 2013 documented that the total cost of corruption is about 260 billion dollars, more than 5% of global GDP and resulting in a 10% increase in business costs. Many papers discuss the impact of corruption on economic growth and social inequity at the macro level (Shleifer and Vishny, 1993; Mo, 2001). However, studies linking corruption to firm-level activities are still rare. Corruption is an important dimension of the institutional environment, and it harms market competition and breeds distortionary political-business relations. Corruption plays a vital role in determining corporate governance and organization behaviors (La Porta et al., 2000). Dass et al. (2017) document that corrupt cultures influence firm decisions by shaping business rules and relations. Smith (2016) examines the impact of official corruption on corporate financial policy and finds that local corruption motivates firms to shelter liquid asset. Paunov (2016) shows that political corruption increases the costs of gaining government innovation services and saps firms’ willingness to innovate. Sun (2014) states that government corruption greatly impacts firms’ tax avoidance strategies. This study investigates the impact of local corruption on corporate cash holdings in China. There are several reasons to do this. Firstly, firms are the foundation for economic vitality and high-quality economic growth. Asset structure plays a significant role in sustaining firm operation. Cash is the most valuable asset and cash allocation directly influences firm performance. Secondly, the effect of corruption on corporate cash holding is controversial. Some argue that corruption results in a higher risk of political extraction, motivating firms to shelter their liquidity assets and reduce their cash holdings (Caprio et al., 2013; Smith, 2016). Others argue that corruption damages market-based rules and institutional constraints, leading to poor corporate governance and serious agency conflicts (La Porta et al., 2000; Chen, 2011; Liu, 2016). Agency conflicts arise because management prefers to hoard more cash to satisfy its private interests (Jensen and Meckling, 1976). It is thus an empirical question how local corruption impacts corporate cash holdings. Thirdly, the huge differences in corruption between provinces in China provide an opportunity to explore this topic and the anticorruption campaign launched by the Chinese government in 2012 offers a unique chance to execute an event study. We begin by formulating two competing hypotheses. The political extraction argument predicts that firms located in more corrupt regions will shelter more liquid assets to avoid exploitation by officials. The agency hypothesis predicts that serious agency conflicts in more corrupt regions will lead firms to hoard more cash for private gain. Using data on A-shared listed firms between 2007 and 2012, we find evidence in favor of the cash sheltering motivation: firms located in more corrupt regions hold less cash. Further analysis shows that the effect of local corruption on corporate cash holding is more significant for non-state-owned enterprises (Non-SOEs) than for state-owned enterprises (SOEs). The cash policies of Non-SOEs without political connections are more sensitive to official corruption than those of Non-SOEs with political connections. In addition, we find that the increase in sheltering cash caused by corruption moves firms away from their optimal cash holding, harming firm value. These findings remain after considering the issue of endogeneity and a series of robustness tests.