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Can comment letters impact excess cash holdings? Evidence from China

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  • Yao, Youfu
  • Hong, Yun

Abstract

Using a panel of Chinese listed firms from the 2015–2018 period, we document that firms receiving cash-related comment letters (CLs) experience a decrease in excess cash holdings of RMB 207.61 million (or US$32.15 million). The cross-sectional tests show that the governance effects of cash-related CLs are more pronounced in firms with high levels of managerial entrenchment and high probabilities of controlling shareholder tunneling but are weaker in politically connected firms. Further tests show that auditors' opinions strengthen cash-related CLs' governance effects, and cash-related CLs curb firms’ overinvestment due to excess cash holdings.

Suggested Citation

  • Yao, Youfu & Hong, Yun, 2023. "Can comment letters impact excess cash holdings? Evidence from China," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 900-922.
    • Handle: RePEc:eee:reveco:v:83:y:2023:i:c:p:900-922
    DOI: 10.1016/j.iref.2022.11.003
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    More about this item

    Keywords

    Comment letters; Excess cash holdings; Twin agency problems; Regulator capture;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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