Corporate Governance and Cash Holdings : A Comparative Analysis of Chinese and Indian Firms

In this study, we examine the impact of concentrated ownership on cash valuation and the level of cash holdings in firms the emerging nations of China and India. Agency theories suggest that firms with high levels of concentrated ownership are subject to greater extraction of private benefits from cash holdings. Our study utilizes Chinese firms data from 1993-2006 and Indian firms data from 2003-2006. We examine the relationship between firm valuation and cash holdings with different levels of governmental ownership concentration, family ownership levels and foreign ownership levels. Our findings show that Chinese firms with high levels of government ownership have larger cash holdings suggesting more opportunities for private benefits extraction thus leading to lower firm valuation. In contrast, we find that Indian firms with high level of family ownership have low cash holdings and record better performance. Chinese investors view governmental ownership as a determinant that reduces firm value. Indian investors see high levels of family ownership as a factor that enhances firm value. This study enhances the body of knowledge concerning the nature of cash holdings and firm value in emerging nations of China and India