State Ownership, Soft-Budget Constraint and Cash Holdings: Evidence from China’s Privatized Firms

Publication Date


Document Type



Journal of Banking & Finance 48 (2014) 276–291


We study the relation between state ownership and cash holdings in China’s share-issue privatized firms from 1993 to 2007. We find that the level of cash holdings declines as state ownership increases. We attribute this negative relation to the soft-budget constraint inherent in state-controlled enterprises that receive financing from the state-owned banking sector. We further examine the effect of state ownership on the value of cash and find that the marginal value of cash declines as state ownership increases. An additional RMB of cash is valued at RMB0.94 for the average sample firm, and an additional RMB is valued RMB0.33 - 0.47 higher in firms with zero percent state ownership than in firms with 50 percent or higher state ownership. Soft-budget constraint exacerbates agency problems inherent in state ownership, contributing to the lower marginal value of cash.