Socioemotional wealth and cash flow sensitivity of cash: Evidence from India

Abstract

This paper examines the controlling shareholders’ propensity to increase Cash flow sensitivity of cash in Indian firms. We hypothesize that the controlling shareholders’ tendency to preserve the socioemotional wealth increases cash flow sensitivity of cash in the Indian firms. Using a sample of Indian firms during 2001–2019, we find that controlling shareholders increase the cash flow sensitivity of cash. Controlling shareholders increase cash flow sensitivity of cash to avoid accessing any form of external capital that may threaten the dispersion of their socio-emotional wealth or increase oversight. We further find that this relationship is stronger in the non-business group affiliates. We observe that the socioemotional wealth of the controlling shareholders takes precedence even in the presence of access to lower cost of capital. Preliminary analyses also observe the means through which controlling shareholders preserve wealth in Indian firms. The results are robust to alternate measures of socioemotional wealth of the controlling shareholders and endogeneity concerns.