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Compulsory liability insurance and excess cash holdings: Evidence from China

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  • Wang, Di
  • Guo, Liangju
  • Xing, Saipeng

Abstract

Our study examines how compulsory food safety liability insurance (CFSLI) relates to excess cash holdings. We use the implementation of CFSLI in different regions and at different times in China to identify its causal effects on the trust goods market using the difference-in-differences method. Our findings show that CFSLI significantly reduces excess cash holdings. Our results are robust to additional tests. The mechanisms that lead to this result are the mitigation of the precautionary motive arising from financing constraints and alleviation of the agency problem. Furthermore, we show that CFSLI plays a significant role in reducing excess cash holdings when there is considerable media coverage or a company is located in a region with a high level of marketization.

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  • Wang, Di & Guo, Liangju & Xing, Saipeng, 2024. "Compulsory liability insurance and excess cash holdings: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 91(C).
    • Handle: RePEc:eee:finana:v:91:y:2024:i:c:s1057521923005276
    DOI: 10.1016/j.irfa.2023.103011
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    More about this item

    Keywords

    Compulsory food safety liability insurance; Excess cash holdings; Precautionary motive; Agency problem; China;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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