The Cash Holdings and Corporate Investment Surrounding Financial Crisis: The Cases of China and Taiwan

Abstract

The widely recognized 2007–2008 financial crisis has introduced observable shifts in cash holdings and corporate investment. We evaluate the effect of the financial crisis on cash holdings, corporate investment, and investment-cash flow sensitivity for China and Taiwan firms over the 2001–2014 period. We observe that in China and Taiwan firms increase equity financing and reduce capital expenditures to raise cash holdings after the crisis. The cash holdings for China firmsrises with operating earnings but declines with dividend payouts, and their working capital is upward overtime. On the contrary, the capital expenditures and working capital of the Taiwan firms becomes more conservative after the crisis. The empirical evidence suggests that corporate investment can be described by liquidity correlated to the state of the capital markets.