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Published in: Eurasian Business Review 4/2021

07-04-2020 | Regular Article

Investment-cash flow sensitivity to internal capital markets and shareholding structure: evidence from Taiwanese business groups

Authors: Yin-Hua Yeh, James Juichia Lin

Published in: Eurasian Business Review | Issue 4/2021

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Abstract

This study examines to what extent investment-cash flow sensitivity in business groups’ is affected by internal capital markets (characterized by related-party transactions) and shareholding structure. We approach the subject by exploring potential financing advantages as contrasted with the agency problem. Using a hand-collected data set to quantify related-party transactions and classify control-enhancing structures, we find that group-affiliated firms with a higher scale of related-party transactions have lower levels of investment-cash flow sensitivity. Further, our results show that related-party transactions are both associated with investment opportunity and the type of shareholding structure, which support both financing advantage and agency hypotheses. The evidence shows that business groups transfer intra-group capital from low-growth to high-growth member firms, but it also demonstrates that the outcomes of these transfers are affected by the type of control-enhancing structure. Additional analysis shows that the agency problem tends to dominate the financing advantage effect in cross-shareholding structures, which leads to overinvestment.

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Appendix
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Footnotes
1
Our data begins from 1997, which is the first year that is available from TEJ and the Market Observation Post System became publicly available. As yearly changes in shareholding structure are generally minimal, we analyzed the data in 5 year intervals. The data exhibit consistency across the four 5-year samples in terms of the scales of internal capital market and the prevalence of ownership structure. We believe this interval is appropriate and meaningful.
 
2
As the median of pyramidal shareholding is greater than zero, we use the median as a determining criteria or dummy variable. As the median of cross shareholding is zero, if the cross shareholding value is greater than zero a dummy variable of 1 (D_Cross) is assigned.
 
3
As guaranteed loans data for affiliated firms are available from JEJ and the Market Observation Post System from 2002, we measure BGaAP and BGbAP with 963 year-firm observations, where BAP are measured with 1584 year-firm observations available from 1997 to 2012.
 
4
Corporate boards play an important role in ratifying and monitoring substantial decisions on behalf of shareholders. Given the likelihood that controlling shareholders can strongly influence the composition of the board, board composition can indicate whether controlling shareholders are further entrenching themselves to expropriate wealth (Yeh and Woidtke 2005). Therefore, we include percentage of board seats held by controlling shareholders and deviation of board controlling right from cash flow rights as our alternative factors for agency cost.
 
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Metadata
Title
Investment-cash flow sensitivity to internal capital markets and shareholding structure: evidence from Taiwanese business groups
Authors
Yin-Hua Yeh
James Juichia Lin
Publication date
07-04-2020
Publisher
Springer International Publishing
Published in
Eurasian Business Review / Issue 4/2021
Print ISSN: 1309-4297
Electronic ISSN: 2147-4281
DOI
https://doi.org/10.1007/s40821-020-00157-7

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