We study the relation between state ownership and cash holdings in China’s share-issue privatized firms from 2000 to 2012. We find that the level of cash holdings increases as state ownership declines. For the average firm in our sample, a 10 percentage-point decline in state ownership leads to an increase of about RMB 55 million in cash holdings. This negative relation can be attributable to the soft-budget constraint (SBC) inherent in state ownership. The Chinese financial system is dominated by the state-owned banks, an environment very conducive for the SBC effect. We further examine and quantify the effect of state ownership on the value of cash and find that the marginal value of cash increases as state ownership declines. The next RMB added to cash reserves of the average firm is valued at RMB 0.96 by the market. The marginal value of cash in firms with zero state ownership is RMB 0.36 higher than in firms with majority state ownership. The SBC effect exacerbates agency problems inherent in state-controlled enterprises, contributing to their lower value of cash.

Using U.S. Department of Justice (DOJ) data on corruption convictions of government officials, we study the effect of public corruption on analyst forecast quality. We find that analyst earnings forecasts for firms headquartered in more corrupt states are less accurate. Our results are robust to endogeneity checks and several alternative corruption measures. In our cross-sectional analysis, we find that the negative effect of corruption on analyst forecast accuracy is more pronounced in government contractor firms and firms with weaker internal governance or external monitoring. We further identify two channels through which corruption negatively influences analyst forecast accuracy: Firms in more corrupt states exhibit lower earnings quality and issue less frequent management guidance.