Vertical interlock and the value of cash holdings

Xin Chen and Chang Yang

Accounting and Finance, 2021, vol. 61, issue 1, 561-593

Abstract: We test whether vertical interlock endangers cash resources that manifests in a lower value of cash in listed companies affiliated with business groups. Using a sample of 9,032 observations from 2007 to 2016 in the Chinese market, we find that investors tend to value cash holdings in companies with vertical interlock substantially less than in those without. The marginal effect of vertical interlock on the value of cash remains significantly negative after controlling for existing governance mechanisms, accounting conservatism and internal control quality, shedding light on agency problems between majority shareholders and minority shareholders within business groups of emerging markets.

Date: 2021
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https://doi.org/10.1111/acfi.12587

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