Investment-cash flow sensitivity to internal capital markets and shareholding structure: evidence from Taiwanese business groups

Yin-Hua Yeh () and James Juichia Lin
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Yin-Hua Yeh: National Chiao Tung University
James Juichia Lin: National Chiao Tung University

Eurasian Business Review, 2021, vol. 11, issue 4, No 5, 637-657

Abstract: Abstract This study examines to what extent investment-cash flow sensitivity in business groups’ is affected by internal capital markets (characterized by related-party transactions) and shareholding structure. We approach the subject by exploring potential financing advantages as contrasted with the agency problem. Using a hand-collected data set to quantify related-party transactions and classify control-enhancing structures, we find that group-affiliated firms with a higher scale of related-party transactions have lower levels of investment-cash flow sensitivity. Further, our results show that related-party transactions are both associated with investment opportunity and the type of shareholding structure, which support both financing advantage and agency hypotheses. The evidence shows that business groups transfer intra-group capital from low-growth to high-growth member firms, but it also demonstrates that the outcomes of these transfers are affected by the type of control-enhancing structure. Additional analysis shows that the agency problem tends to dominate the financing advantage effect in cross-shareholding structures, which leads to overinvestment.

Keywords: Investment-cash flow sensitivity; Internal capital market; Related-party transactions; Business groups; Shareholding structure (search for similar items in EconPapers)
JEL-codes: G31 G32 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s40821-020-00157-7

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