Parent company board reform and subsidiary optimization of cash holdings: A quasi-natural experiment from central state-owned enterprises in China

Abstract

This study finds that board reform of parent companies in central state-owned enterprise (SOE) groups in China has significantly optimized the cash holdings of subsidiaries, which is reflected in reducing the level of cash redundancy and cash shortage. Moreover, the optimization function manifests mainly in moderate pyramid hierarchy samples, longer geographic distance samples, and fewer vertical interlocks of executive samples between the parent company and subsidiaries. In addition, we examine whether the mechanism for optimizing cash holdings alleviates agency problems, reduces government intervention, and promotes power delegation. Board reform also improves corporate value by optimizing cash holdings. We argue that board reform of parent companies in SOE groups helps alleviate problems caused by the absence of owners, and it reconstructs the power relationship between the government and SOEs. It also facilitates SOEs making reasonable and market-oriented cash holding decisions.