7 Conclusion
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.
