لایه های سرمایه گذاری زیرمجموعه والدین و ارزش دارایی های نقدی شرکت های بزرگ Parent-subsidiary investment layers and the value of corporate cash holdings

1 Introduction Corporate liquidity management has received considerable attention from academia and practitioners in recent years due to dramatic increases in the amount of cash held by firms. In the United States, for example, the ratio of cash holdings to total assets increased from 10.5% in 1980 to 23.2% in 2006 (Bates et al. 2009). Chang (2015) also finds that the same cash holding ratio doubles from 2003 to 2013 for Taiwan firms. Cash holdings can be a double-edged sword that is able to harm as well as benefit investors. Specifically, cash holdings can create value when external financing becomes costly (Myers 1977). They can also act as a buffer against cash flow uncertainty, or be used for risky corporate investment (Bates et al. 2009). Alternatively, cash holdings have a low return on asset investment (Dittmar et al. 2003), and if not properly monitored, they can promote suboptimal investment and private-benefits extraction behaviors, thereby destroying firm value (Jensen 1986; Harford 1999). This study investigates the market value of corporate cash holdings in connection with the pyramidal investment structure. In the pyramidal structure, the parent firms frequently control multiple subsidiaries through an indirect ownership structure (e.g., father–son– grandson relationship), consisting of a parent company on top and successive layers of subsidiaries below (Hoyle et al. 2011). Pyramidal structures can also function as substitutes for imperfect external capital markets, especially in cases where market institutions are less developed (Claessens et al. 2002; Almeida and Wolfenzon 2006a, b; Khanna and Yafeh 2007). We capture an important feature of corporate pyramids by measuring the number of investment layers connecting the parent firm to its lowest-tiered subsidiary and investigate whether the value of a firm’s cash holdings is associated with the number of investment layers.1 Ours is the first study to examine whether the value of cash holdings at the consolidated level is also affected by the parent-subsidiary investment structure.2 We argue that the agency costs of cash holdings for pyramid firms are likely to be significant. Theories predict that establishing a long span of pyramidal layers allows the parent firm to leverage up its control relative to its ownership of the bottom-layered subsidiaries (e.g., La Porta et al. 1999; Claessens et al. 2002) and produces incentives for controlling shareholders in order to pursue rent-seeking behaviors, such as cross-subsidiary subsidizing and expropriation from minority shareholders (Johnson et al. 2000; Bebchuk et al. 2000; Bae et al. 2002; Morck et al. 2005). A large amount of cash holdings may tempt controlling shareholders and management to engage in wasteful expenditures and suboptimal investments. Harford (1999) finds that cash-rich firms make suboptimal acquisitions. Opler et al. (1999) and Lamont (1997) find that cash-rich firms are associated with suboptimal capital expenditures and tend to cross-subsidize poorly performing projects. Since the long span of the investment layers gives rise to the deviation between the controlling parent’s cash flow rights and the voting rights over the lower-layered subsidiaries, entrenchment effects set in and thus more severe agency conflicts between controlling shareholders and minority shareholders are anticipated.