Abstract
Leveraging China's 2006 split-share reform (converting previously non-tradable shares into tradable shares) as an exogenous shock, we use an agency conflict framework to examine the impact of a shareholder ownership structure on a firm's cash holdings. Our findings suggest that both the top shareholder ownership percentage and the checks and balances of other large shareholders (the ratio of second- and third-largest shareholder combined ownership to that of the top shareholder) positively affect a firm's cash holdings after the Reform. However, the increase in cash holdings exhibits a decreasing rate. The results are consistent with the notion that both Type I (between management and shareholders) and Type II (between controlling and minority shareholders) agency problem affect a firm's cash holdings. While both state-owned firms (SOEs) and non-state-owned firms (non-SOEs) exhibit qualitatively similar findings, the impact of the top shareholder ownership and the checks and balances of other large shareholder structure changes on cash holdings is more salient among non-SOEs.
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