Compulsory liability insurance and excess cash holdings: Evidence from China

Our study examines how compulsory food safety liability insurance (CFSLI) relates to excess cash holdings. We use the implementation of CFSLI in different regions and at different times in China to identify its causal effects on the trust goods market using the difference-in-differences method. Our findings show that CFSLI significantly reduces excess cash holdings. Our results are robust to additional tests. The mechanisms that lead to this result are the mitigation of the precautionary motive arising from financing constraints and alleviation of the agency problem. Furthermore, we show that CFSLI plays a significant role in reducing excess cash holdings when there is considerable media coverage or a company is located in a region with a high level of marketization.

Automated summary

This study examines the impact of compulsory food safety liability insurance (CFSLI) on excess cash holdings and finds that CFSLI significantly reduces such holdings. It also highlights the role of media coverage and marketization level in influencing the effectiveness of CFSLI in reducing excess cash holdings.