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The Effect of Dialect Sharing on Corporate Cash Holdings in China

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  • Guoqiang Hu
  • Jason Zezhong Xiao
  • Yuhan Zhen

Abstract

Language is an important dimension of culture. Dialect diversity is a prevalent phenomenon in many countries. This paper examines whether dialect sharing between the chairperson and the CEO (CCDS) affects corporate cash holdings and, if so, through which channels. We obtain robust evidence that CCDS has a negative and significant effect on the level of corporate cash holdings, and this effect remains after controlling for home‐town sharing. Moreover, this negative effect occurs by mitigating the company's agency motive and precautionary motive for cash holdings. We further demonstrate an information mechanism, a reputation mechanism, a CEO risk‐incentive mechanism, and a cooperation mechanism through which CCDS reduces cash holdings. The negative effect of CCDS on cash holdings is more pronounced among firms whose chairperson and CEO both work outside their home towns, but the difference is insignificant between state‐owned enterprises (SOEs) and non‐SOEs. Finally, we find that CCDS improves the optimal level of cash holdings by reducing excess cash. These results indicate that this cultural connection can be a substitute for formal corporate governance mechanisms when corporate governance is weak. It can also be used as a useful financial risk management tool in dealing with firms’ uncertainty.

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  • Guoqiang Hu & Jason Zezhong Xiao & Yuhan Zhen, 2022. "The Effect of Dialect Sharing on Corporate Cash Holdings in China," Abacus, Accounting Foundation, University of Sydney, vol. 58(3), pages 393-431, September.
    • Handle: RePEc:bla:abacus:v:58:y:2022:i:3:p:393-431
    DOI: 10.1111/abac.12247
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    2. Xiong, Jiacai & Yang, Zelin & Wang, Xin & Chan, Kam C., 2023. "Does dialect diversity affect entrepreneurial activities? Evidence from China," Economic Modelling, Elsevier, vol. 128(C).
    3. Song, Chen & Chen, Leqin, 2023. "Effects of dialect connectedness between chairperson and CEO on corporate innovation in China," Global Finance Journal, Elsevier, vol. 57(C).
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