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Our study investigates whether agency costs arising from organizational structure in terms of the number of investment layers which connect the parent firm and its lowest-tiered subsidiaries within the corporate pyramid are associated with the value of cash holdings. Using a sample of Taiwanese publicly traded firms, we find that a change of a dollar in cash holdings is associated with less than a dollar change in market value. In line with our expectation, we find that the marginal value of cash decreases with the number of investment layers, supporting the agency theory of excess cash holdings. We also find that the negative association between the number of layers and the value of cash holdings is stronger for firms with high deviation between cash flow and voting rights and for familycontrolled firms.
We examine whether the value of a firm’s cash holdings is influenced by its organizational structure (i.e., the number of layers within the corporate pyramid), ownership structure (i.e., the deviation between cash flow and voting rights), and the presence of family control. To address these research questions, we employ a sample of publicly traded companies in Taiwan, since all publicly traded companies in Taiwan are required to disclose information on all of their subsidiaries according to CGPAR, which allows us to calculate the number of layers based on publicly available affiliation information. We find that firms with more layers are associated with a lower value of cash holdings. The results support the agency theory of cash holdings, suggesting that although pyramidal firms enjoy the benefits of internal capital markets, as indicated by prior studies (Khanna and Yafeh 2005; Gopalan et al. 2007; Masulis et al. 2011), as agency costs increase with the number of investment layers, the value to shareholders of holding additional cash decreases. In addition, we find that the negative association is stronger when the parent firm’s ownership of the lower-layered subsidiaries is less than its voting rights (i.e., the deviation between cash flow and voting rights is high) and when firms are controlled by family owners. These results further support the agency theory of cash holdings since firms whose ownership structure creates a wide deviation between cash flow and voting rights and firms which are controlled by family owners are characterized as having more agency conflict between controlling and non-controlling shareholders.