Regulatory influence on corporate cash holdings: Minority shareholder activism by regulators

Focusing on an exogenous shock to minority investor activism, we investigate the effect of the China Securities Investor Services Center (CSISC), a minority shareholder protection mechanism introduced by the China Securities Regulatory Commission, on corporate cash holdings. Using a firm-quarter sample of Chinese listed companies from 2015 to 2017, we find that firms increased their cash holdings after CSISC became a minority shareholder. Channel tests and estimates of the cash flow sensitivity of cash reveal that this increase is primarily driven by precautionary motives, as firms prepare for potential financial uncertainties under CSISC's oversight. We further explore the role of governance-related factors-internal control quality, institutional ownership, and analyst coverage-and find that while CSISC's involvement strengthens governance by mitigating agency motives, it maintains a strong precautionary basis for increased cash holdings in response to heightened regulatory monitoring. This research highlights CSISC's critical role in influencing corporate liquidity management and enhancing investor protection in emerging markets.