Ownership, Internal Capital Markets, and Cash Holdings

Chinese rapid economy development and financial market is not coordinated, so distortions exist in the allocation of credit resources, which often occurs via internal capital markets (ICMs). This article studies the effects of ICMs in China on the distribution of cash resources to enterprises based on operating data of ICM, finding that ICM can significantly reduce cash holdings, especially for private enterprises. Further dividing internal financial transactions by its nature, it is found that non-operating transactions with financing nature can play a significant role in reducing the level of cash holdings.