Abstract: Value of firm cash holding refers to how level of firm cash holdings affects future stock return. In China’s A share market, sentimental individual investors dominate this market, and arbitrage mechanisms that partly determine market efficiency are not very effective, such that firm transparency is not always very high but volatility of stock price is always high. All these factors can discourage arbitragers to carry out arbitraging activities. Based on behavioral finance, sentimental investors and limits to arbitrage are factors that affect asset pricing efficiency. So, how investor sentiment and level of limits to arbitrage affect value of firm cash holding is a disputable issue that needs to be settled, because investigating value of firm cash holding is useful for firms to make cash holding decisions, and for investor to optimize their investment portfolios, and can enrich the research on value of firm cash holding and behavioral finance.
Financial data and monthly stock trading data are from the CSMAR data provider. To prove how level of firm cash holding affects firm value, this paper conducts correlation analysis, portfolio return analysis and OLS regression. We also calculate and analyze abnormal returns of the ten portfolios based on level of firm cash holding. The results show that abnormal returns of these portfolios increase with level of firm cash holdings. We conduct a two-way portfolio return analysis based on level of limits to arbitrage and level of firm cash holding to prove how limits to arbitrage affect value of firm cash holding. Specifically, we sort the whole sample into three portfolios based on level of limits to arbitrage and then sort each sub-sample into ten portfolios based on level of firm cash holding and calculate returns of each portfolio. We also conduct one-way portfolios return analysis in both low and high investor sentiment periods to prove how investor sentiment affects value of firm cash holdings. The results show that value of firm cash holdings is high in a low investor sentiment period and low in a high investor sentiment period.
Conclusions can be summarized as three aspects. First, value of firm cash holding is positive, which means that level of firm cash holdings can positively predict future stock return. Second, value of firm cash holding is high in periods when investor sentiment is low because investors are more risk aversion in these periods, and they are more willing to hold less risky assets, such as stocks of firms holding more cash. Third, value of firm cash holding is high in firms facing high level of limits to arbitrage because limits to arbitrage can hinder investors’ pessimistic sentiment on stock price and the stock price will be mostly affected by optimistic investors. In other words, there is an asymmetry effect of investor sentiment on value of firm cash holding because of limits to arbitrage, such as the short selling constraints and arbitrage risk. Applications of these findings can be summarized as three aspects. First, investors can use these findings to optimize their portfolios and improve investment return, and asset pricing efficiency in China’s A share market can be improved consequently. Second, thefindings have important implication for listed firms in China’s A share market when they make cash holding decisions. Third, this research can be used as investor education material which can help mitigate irrational investors’ behavior.
In the further study, we can investigate how investor sentiment and limits to arbitrage affect value of firm cash holding using other potential proxies for the measurement of level of investor sentiment and limits to arbitrage, and these measurements should be based on China’s A share market. Because how to measure the level of investor sentiment and limits to arbitrage is a disputable issues, the measurements used in this papers are commonly used in developed capital market. Second, we can further investigate how investor sentiment and limits to arbitrage affect asset pricing effect of other firm’s financial policies, such as investment or dividend policy. Third, we can investigate the joint effect of investor sentiment and limits to arbitrage on the value of firm cash holdings.

Key words: investor sentiment; limits to arbitrage; value of cash holding; asset pricing effect

摘要： 现金作为企业流动性最强的资产,可通过缓解企业融资约束,降低债务违约风险和支付风险增加企业价值,但在代理问题严重的公司中,自由现金流的代理成本也可能会损害企业价值。本研究立足中国资本市场现实背景,探究投资者情绪及有限套利对上市公司现金持有价值的影响。研究发现:在A股市场背景下,上市公司现金持有价值显著为正值;在投资者情绪低落期,上市公司持有现金的正向资产定价效应更加明显;在信息透明度低、股票换手率高、股价触及涨跌停次数多、股票交易额高等有限套利程度较高的样本中,上市公司正向现金持有价值更加明显。本研究提供了有关新兴市场国家上市公司持有现金具有资产定价效应及投资者情绪、有限套利因素影响资产定价的具体证据,这对上市公司优化现金管理及监管部门优化监管措施提高资本市场效率具有重要意义。

关键词: 投资者情绪, 有限套利, 现金持有价值, 资产定价效应