Do firms accumulate cash balances through financing persistent negative cash flows? Evidence from China

Drawing on samples from the U.S. and China, we replicate Denis and McKeon's (2021) study to investigate how asset intangibility and net cash flows (NCFs) jointly affect firms' cash holdings in both countries. Our findings reveal that U.S. firms characterized by high asset intangibility and negative NCFs maintain larger cash balances. Conversely, in China, the firms with high asset intangibility and positive NCFs are the ones holding greater cash balances. We attribute this to China's bank-centric and underdeveloped market-oriented nature, which creates barriers for Chinese firms with high asset intangibility and negative NCFs to regularly obtain external funds. In contrast, Chinese firms with positive NCFs are able to build their cash reserves by stockpiling profits, enabling them to finance intangible investments.