The Effect of Dialect Sharing on Corporate Cash Holdings in China

Language is an important dimension of culture. Dialect diversity is a prevalent phenomenon in many countries. This paper examines whether dialect sharing between the chairperson and the CEO (CCDS) affects corporate cash holdings and, if yes, through which channels. We obtain robust evidence that CCDS has a negative and significant effect on the level of corporate cash holdings, and this effect remains after controlling for hometown sharing. Moreover, this negative effect occurs by mitigating the company’s agency motive and precautionary motive for cash holdings. We further demonstrate an information mechanism, a reputation mechanism, a CEO risk-incentive mechanism and a cooperation mechanism through which the CCDS reduces cash holdings. The negative effect of the CCDS on cash holdings is more pronounced among firms whose chairperson and CEO both work outside their hometowns, but the difference is insignificant between SOEs and non-SOEs. Finally, we find that the CCDS improves the optimal level of cash holdings by reducing excess cash. These results indicate that this cultural connection can be a substitute for formal corporate governance mechanisms when corporate governance is weak and can also be used as a useful financial risk management tool in dealing with firms’ uncertainty