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

Yin Hua Yeh*, James Juichia Lin

*Corresponding author for this work

Research output: Contribution to journalArticle

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.

Original languageEnglish
JournalEurasian Business Review
DOIs
StateAccepted/In press - Apr 2020

Keywords

  • Business groups
  • Internal capital market
  • Investment-cash flow sensitivity
  • Related-party transactions
  • Shareholding structure

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