The Effects of Business Group Characteristics on FirmCash Holdings: Evidence from Taiwan

Abstract

 Abstract—This paper tests the relationship between business group characteristics and corporate cash holdings for business group-affiliated firms listed on the Taiwan Stock Exchange and in the Over-The-Counter market from 2000 to 2009. Specifically, this paper employs group affiliation, group diversification, group ownership holdings, and group listed numbers as business group characteristic variables. The empirical results reveal that group-affiliated firms hold more cash than non-affiliated firms. Besides, the results show that more highly-diversified groups, groups with more stock ownership holdings, and groups with fewer listed firms hold lower cash balances. Business groups play a prominent role in economic development in Taiwan. According to the investigative report on business groups in Taiwan provided by China Credit Information Service (CCIS), Ltd., the employment of the top 100 business groups accounted for about 11% of the Taiwanese employed population in 2009. Compared with their stand-alone counterparts, business group-affiliated firms are more likely to acquire financial capital from an efficient business environment because the business groups act as a social network that offers benefits to their affiliates and resolve the problems that arise from the imperfections in the emerging markets (1). Nevertheless, Yeh and Woidtke (2) indicate that business groups in Taiwan are characterized by their relatively weak protection of minority shareholders. Kusnadi (3) shows that those managers in firms with a pyramidal group ownership structure are inclined to accumulate cash balances, and the presence of a pyramidal ownership structure in firms could lead to an entrenchment effect and therefore an increase in agency costs. Previous studies on business groups have analyzed the relationship between business group affiliation and group- affiliated firms' performance, innovation, and leverage policies (4), (5), (6), (7). However, little attention has been directed to addressing business group characteristic effects on the cash holding decisions of group-affiliated firms. Corporate cash holdings play an important role in a firm's assets and operating activities. Firms' cash holdings have received much attention from corporate managers, investors,