How Do Financial Asset Holdings Affect Firm Value? Evidence from China

This study examines the impact of financial asset holdings on firm value. Using a large panel sample with 86,050 firm-quarter observations, we posit and find a significant positive impact of corporate financial asset holdings on Tobin's Q, suggesting that firm value appreciates after financial asset holdings increase. We also find that the impact becomes more pronounced for investments held to maturity and financial assets held for trading, which implies that liquidity and fund utilization are the main mechanisms through which financial asset holdings enhance firm value. In addition, there are also evidences suggesting that part of the value-enhancing effect of financial asset holdings comes from building stakeholder confidence. The main findings of the paper are proved to be robust after a careful examination of the endogeneity issues and accounting for potential heterogeneities of the firms.