Corporate Ownership Structure and Cash Holding in Family Controlled Firms: Evidence from the NTS Reform in China

Abstract

This study examines the effect of excess control rights on cash holding policy of Chinese family controlled firms. We find that excess control rights are positively associated to firms’ cash holding of family controlled firms and that the high cash holding are tunnelled by controlling families other than be invested or paid to shareholders. In addition, the high cash holding and tunnelling in family controlled firms are reduced after the NTS reform. We further show that the corporate governance mechanism in family controlled firms cannot properly reduce the tunnelling from controlling families because the second large shareholders actually collude with controlling family and controlling families increase their tunnelling through board control. Finally high cash holdings in family controlled firms with excess control rights are found to have a negative marginal effect on firm value. Overall, we argue that family control is harmful to firm value, while the weak corporate governance make the situation worse and proper reform in the capital market that aims to align the interest between controlling and minority shareholders helps to alleviate the issue.