Latent corporate governance: The impact of Confucianism on the value of cash holdings

We examine how investors value a firm's cash holdings based on its degree of Confucian influence. Our findings reveal that firms with stronger Confucian influence have a higher marginal value of cash, indicating that investors place greater value on cash in these firms. The positive influence of Confucianism on the value of cash is more pronounced in poorly governed firms but less so in high-growth or financially constrained firms. Collectively, our results suggest that Confucianism affects the value of cash through three channels: the agency problem, risk avoidance, and information asymmetry, with the agency problem being the dominant channel. This indicates that investors perceive Confucianism as a latent governance mechanism, enhancing their valuation of cash holdings of firms influenced by Confucianism.