Excess Control Rights, Multiple Large Shareholders, and Corporate Cash Holding Behavior

Benkraiem, Ramzi; Boubaker, Sabri; DEROUICHE, Imen; Galariotis, Emilios

Request a copy

Article (Scientific journals)

Excess Control Rights, Multiple Large Shareholders, and Corporate Cash Holding Behavior

Benkraiem, Ramzi; Boubaker, Sabri; DEROUICHE, Imen et al.

2023 • In Finance

Peer reviewed

Permalink
https://hdl.handle.net/10993/49766

Files (1)Send to Details Statistics Bibliography Similar publications

Files

Full Text

Anonymous version.pdf

Author preprint (834.19 kB)

Request a copy

All documents in ORBilu are protected by a user license.

Send to

RIS BibTex APA Chicago Permalink X Linkedin

Details

Keywords :

Excess control rights; Corporate cash holding behavior; Multiple large shareholders

Abstract :

[en] This article examines the effects of excess control rights of the controlling shareholder and the presence of multiple large shareholders on the propensity of firms to save cash out of cash flow, i.e. the sensitivity of cash to cash flow. Using a data set covering 6,430 firm–year observations of 634 French listed firms, the evidence shows that firms have high cash flow sensitivity of cash when the controlling shareholder‘s control rights exceed its cash-flow ownership. However, this sensitivity decreases with the contestability of the controlling owner‘s power. Taken together, these findings provide empirical support to the argument that firms experiencing excess control rights save more cash out of cash flow due to their considerable financial constraints that are lowered in the presence of high control contestability.

Disciplines :

Finance

Author, co-author :

Benkraiem, Ramzi; Audencia Business School

Boubaker, Sabri; EM Normandie Business School, Métis Lab, France

DEROUICHE, Imen ; University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Department of Economics and Management (DEM)

Galariotis, Emilios; Audencia Business School

External co-authors :

yes

Language :

English

Title :

Excess Control Rights, Multiple Large Shareholders, and Corporate Cash Holding Behavior

Publication date :

2023

Journal title :

Finance

ISSN :

0752-6180

eISSN :

2101-0145

Publisher :

Presses Universitaires de Grenoble, Grenoble, France

Peer reviewed :

Peer reviewed

Available on ORBilu :

since 19 January 2022

Statistics

Number of views

136 (1 by Unilu)

Number of downloads

0 (0 by Unilu)

More statistics

Scopus citations^®

Scopus citations^®
without self-citations

Bibliography

Acharya, V., Almeida, H. and Campello, M. (2007). ‘Is cash negative debt? A hedging perspective on corporate financial policies’, Journal of Financial Intermediation 16, 16–515.
Adams, R. B., Santos, J. A. (2006). ‘Identifying the effect of managerial control on firm performance’, Journal of Accounting and Economics 41, 55–85.
Almeida, H., Campello, M., Weisbach, M. (2004). ‘The cash flow sensitivity of cash’, The Journal of Finance 59, 59–1777.
Almeida, H.V. and Wolfenzon, D. (2006). ‘A theory of pyramidal ownership and family business groups’, The Journal of Finance 61, 2637–2680.
Anderson, R. C., Mansi, S. A., & Reeb, D. M. (2003). Founding family ownership and the agency cost of debt. Journal of Financial economics, 68(2), 263–285.
Aslan, H., Kumar, P. (2012). ‘Strategic ownership structure and the cost of debt’, Review of Financial Studies 25, 25–2257.
Attig, N., Guedhami, O., Mishra, D. (2008). ‘Multiple large shareholders, control contests, and implied cost of equity’, Journal of Corporate Finance 14, 14–721.
Attig, N., El Ghoul, S., Guedhami, O. (2009). ‘Do multiple large shareholders play a corporate governance role? Evidence from East Asia’, Journal of Financial Research 32, 32–395.
Baker, M., Stein, J.C., Wurgler, J. (2003). ‘When does the market matter? Stock prices and the investment of equity-dependent firms’, Quarterly Journal of Economics 118, 118–969.
Bauguess, S.W., Slovin, M.B., Sushka, M.E. (2012). ‘Large shareholder diversification, corporate risk taking, and the benefits of changing to differential voting rights’, Journal of Banking and Finance 36, 36–1244.
Baum, C. F., Schäfer, D., Talavera, O. (2011). ‘The impact of the financial system’s structure on firms’ financial constraints’, Journal of International Money and Finance 30, 30–678.
Bates, T., Kahle, K., Stulz, R. (2009). ‘Why do US firms hold so much more cash than they used to?’, The Journal of Finance 64, 64–1985.
Ben-Nasr, H., Boubaker, S., Rouatbi, W. (2015). ‘Ownership structure, control contestability, and corporate debt maturity’, Journal of Corporate Finance 35, 35–265.
Bennedsen, M., Wolfenzon, D. (2000). ‘The balance of power in closely held corporations’, Journal of Financial Economics 58, 58–113.
Bennedsen, M., Nielsen, K. (2010). ‘Incentive and entrenchment effects in European ownership’, Journal of Banking & Finance 34, 34–2212.
Bebchuk, L. A., Kraakman, R., & Triantis, G. (2000). Stock pyramids, cross-ownership, and dual class equity: the mechanisms and agency costs of separating control from cash-flow rights. In Concentrated corporate ownership (pp. 295–318). University of Chicago Press.
Beck, Nathaniel. 2001. Time-series-cross-section data: What have we learned in the past few years? Annual Review of Political Science 4:271–93.
Bigelli, M., & Sánchez-Vidal, J. (2012). Cash holdings in private firms. Journal of Banking & Finance, 36(1), 26–35.
Billett, M. T., Garfinkel, J. A., & Jiang, Y. (2011). The influence of governance on investment: Evidence from a hazard model. Journal of Financial Economics, 102(3), 643–670.
Boubakri, N., Ghouma, H. (2010). ‘Control/ownership structure, creditor rights protection, and the cost of debt financing: international evidence’, Journal of Banking & Finance 34, 34–2481.
Boutin, X., Cestone, G., Fumagalli, C., Pica, G., & Serrano-Velarde, N. (2013). The deep-pocket effect of internal capital markets. Journal of Financial Economics, 109(1), 122–145.
Claessens, S., Djankov, S., Fan, J., Lang, L. (2002). ‘Disentangling the incentive and entrenchment effects of large shareholdings’, The Journal of Finance 57, 57–2741.
Denis, D. J. (2011). Financial flexibility and corporate liquidity. Journal of Corporate Finance, 17(3), 667–674.
Dyck, A., & Zingales, L. (2004). Private benefits of control: An international comparison. The journal of finance, 59(2), 537–600.
Bao, D., Chan, K. C., & Zhang, W. (2012). Asymmetric cash flow sensitivity of cash holdings. Journal of Corporate Finance, 18(4), 690–700.
Ben-Nasr, H., Boubaker, S., & Rouatbi, W. (2015). Ownership structure, control contestability, and corporate debt maturity. Journal of Corporate Finance, 35, 265–285.
Boubaker, S. (2007). ‘Ownership-control discrepancy and firm value: Evidence from France’, Multinational Finance Journal 11, 11–211.
Boubakri, N., Ghouma, H. (2010). ‘Control/ownership structure, creditor rights protection, and the cost of debt financing: international evidence’, Journal of Banking & Finance 34, 34–2481.
Boubaker, S., Derouiche, I., Lasfer, M. (2015). ‘Geographic location, excess control rights, and cash holdings’, International Review of Financial Analysis, 42, 24–37.
Boubaker, S., Rouatbi, W., & Saffar, W. (2017). The role of multiple large shareholders in the choice of debt source. Financial Management, 46(1), 241–274.
Bound, J., Jaeger, D. A., & Baker, R. M. (1995). Problems with instrumental variables estimation when the correlation between the instruments and the endogenous explanatory variable is weak. Journal of the American statistical association, 90(430), 443–450.
Bourveau, T., Brochet, F., & Garel, A. (2022). The Capital Market Consequences of Tenure-Based Voting Rights: Evidence from the Florange Act. Management Science.
Buysschaert, A., Deloof, M., Jegers, M. (2004). ‘Equity sales in Belgian corporate groups: expropriation of minority shareholders? A clinical study’, Journal of Corporate Finance 10, 81–103
Cai, C. X., Hillier, D., & Wang, J. (2016). The cost of multiple large shareholders. Financial Management, 45(2), 401–430.
Campbell, J. (1996). ‘Understanding risk and return’, Journal of Political Economy 104, 104–298.
Cao, X., Leng, T., Goh, J., & Malatesta, P. (2020). The innovation effect of dual-class shares: New evidence from US firms. Economic Modelling, 91, 347–357.
Chang, X., Dasgupta, S., Wong, G., Yao, J. (2014). ‘Cash-flow sensitivities and the allocation of internal cash flow’, Review of Financial Studies 27, 27–3628.
Claessens, S., Djankov, S., Lang, L. (2000). ‘The separation of ownership and control in East Asian corporations’, Journal of Financial Economics 58, 58–81.
Claessens, S., Djankov, S., Fan, J., Lang, L. (2002). ‘Disentangling the incentive and entrenchment effects of large shareholdings’, The Journal of Finance 57, 57–2741.
Claessens, S., Djankov, S., Fan, J., Lang, L. (2002). ‘Disentangling the incentive and entrenchment effects of large shareholdings’, The Journal of Finance 57, 57–2741.
Cronqvist, H., & Nilsson, M. (2003). Agency costs of controlling minority shareholders. Journal of Financial and Quantitative analysis, 38(4), 695–719.
Faccio, M., Lang, L. H., & Young, L. (2001). Dividends and expropriation. American economic review, 91(1), 54–78.
Dambra, M. J. (2018). ‘Stakeholder Conflicts and Cash Flow Shocks: Evidence from Changes in ERISA Pension Funding Rules’, The Accounting Review 93, 131–159.
DeAngelo, H., DeAngelo, L. (1985). ‘Managerial ownership of voting rights: A study of public corporations with dual classes of common stock’, Journal of Financial Economics 14, 14–33.
Derouiche, I., Sassi, S., Toumi, N. (2018). ‘The control–ownership wedge and the survival of French IPOs’, Journal of Applied Accounting Research 19, 271–294
Devos, E., Dhillon, U., Jagannathan, M., Krishnamurthy, S. (2012). ‘Why are firms unlevered?’, Journal of Corporate Finance 18, 18–664.
Dimitrov, V., Jain, P.C. (2006). ‘Recapitalization of one class of common stock into dual-class: Growth and long-run stock returns’, Journal of Corporate Finance 12, 12–342.
Doidge, C. (2004). ‘US cross-listings and the private benefits of control: evidence from dual-class firms’, Journal of Financial Economics 72, 72–519.
Drobetz, W., Haller, R., Meier, I., Tarhan, V. (2017). ‘The impact of liquidity crises on cash flow sensitivities’, The Quarterly Review of Economics and Finance 66, 225–239.
Drobetz, W., Janzen, M., Meier, I. (2019). ‘Investment and financing decisions of private and public firms’, Journal of Business Finance & Accounting, 46, 225–262.
Dupuy, P., Albouy, M., Bonnet, C. and Mchawrab, S. (2020). ‘Cash holdings and the selection effect in the Eurozone’, Finance, 41(2), pp.53–106.
Faccio, M., Lang, L. (2002). ‘The ultimate ownership of Western European corporations’, Journal of Financial Economics 65, 65–365.
Fang, J., Pittman, J., Zhang, Y., Zhao, Y. (2017). ‘Auditor Choice and Its Implications for Group‐Affiliated Firms’, Contemporary Accounting Research 34, 39–82.
Faulkender, M. and Wang, R. (2006). ‘Corporate financial policy and the value of cash’, The Journal of Finance 61, 61–1957.
Fazzari, S.M., Hubbard, R.G., Petersen, B.C. (1988). ‘Financing constraints and corporate investment’, Brookings Papers on Economic Activity 1, 1–141.
Forst, A., Hettler, B., Barniv, R. R. (2019). ‘Insider Ownership and Financial Analysts’ Information Environment: Evidence From Dual-Class Firms’, Journal of Accounting, Auditing & Finance, 34, 30–53.
Gao, N., Mohamed, A. (2018). ‘Cash-rich acquirers do not always make bad acquisitions: New evidence’, Journal of Corporate Finance 50, 243–264.
Gogineni, S., Linn, S.C., and Yadav, P.D. (2021, forthcoming). Vertical and horizontal agency problems in private firms: Ownership structure and operating performance. Journal of Financial and Quantitative Analysis.
Guedhami, O., Mishra, D. (2009). ‘Excess control, corporate governance and implied cost of equity: international evidence’, Financial Review 44, 44–489.
Grinapell, A. (2021). What Drives the Use of Dual-Class Structures in Technology IPOs?. Journal of Law, Economics and Policy.
Hamelin, A. (2011). Small business groups enhance performance and promote stability, not expropriation. Evidence from French SMEs. Journal of Banking and Finance, 35(3), 613–626.
Heckman, J. J. (1979). Sample selection bias as a specification error. Econometrica: Journal of the econometric society, 153–161.
Jiang, F., Cai, W., Wang, X., Zhu, B. (2018). ‘Multiple large shareholders and corporate investment: Evidence from China’, Journal of Corporate Finance 50, 66–83.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of financial economics, 3(4), 305–360.
Jiang, L., Kim, J. B., & Pang, L. (2011). Control-ownership wedge and investment sensitivity to stock price. Journal of Banking & Finance, 35(11), 2856–2867.
Jiang, F., Ma, Y., & Wang, X. (2020). ‘Multiple blockholders and earnings management’, Journal of Corporate Finance 64, 101689.
Kaplan, S.N., Zingales, L. (1997). ‘Do investment–cash flow sensitivities provide useful measures of financing constraints?’, Quarterly Journal of Economics 112, 112–169.
Khurana, I., Martin, X., Pereira, R. (2006). ‘Financial development and the cash flow sensitivity of cash’, Journal of Financial and Quantitative Analysis 41, 41–787.
Kling, G. (2018). ‘A theory of operational cash holding, endogenous financial constraints, and credit rationing’, The European Journal of Finance 24, 59–75.
Kulchania, M., Thomas, S. (2017). ‘Cash reserves as a hedge against supply-chain risk’, Journal of Financial and Quantitative Analysis 52, 1951–1988.
Kuo, L. W. (2017). ‘Reputation as a governance mechanism? Evidence from payout policy of insider‐controlled firms in Taiwan’, Journal of Business Finance & Accounting 44, 1443–1476.
Kusnadi, Y., Wei, K.C. (2011). ‘The determinants of corporate cash management policies: evidence from around the world’, Journal of Corporate Finance 17, 17–725.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., Vishny, R. (1999). ‘Corporate ownership around the world’, The Journal of Finance 54, 54–471.
La Porta, R., Lopez‐de‐Silanes, F., Shleifer, A. and Vishny, R. (2002). ‘Investor protection and corporate valuation’, The Journal of Finance 57, 57–1147.
La Rocca, M., Stagliano, R., La Rocca, T., Cariola, A., and Skatova, E. (2019). Cash holdings and SME performance in Europe: The role of firm-specific and macro-economic factors. Small Business Economics, 53(4), 1051–1078.
Laeven, L., Levine, R. (2008). ‘Complex ownership structures and corporate valuations’, Review of Financial Studies 21, 21–579.
Leuz, C., Lins, K. V., & Warnock, F. E. (2009). Do foreigners invest less in poorly governed firms?. The Review of Financial Studies, 22(8), 3245–3285.
Lim, L. (2016). Dual-class versus single-class firms: information asymmetry. Review of Quantitative Finance and Accounting, 46(4), 763–791.
Lin, C., Ma, Y., Xuan, Y. (2011). ‘Ownership structure and financial constraints: evidence from a structural estimation’, Journal of Financial Economics 102, 102–416.
Lin, C., Ma, Y., Malatesta, P., Xuan, Y. (2011). ‘Ownership structure and the cost of corporate borrowing’, Journal of Financial Economics 100, 100–1.
Lin, C., Ma, Y., Malatesta, P., Xuan, Y. (2013). ‘Corporate ownership structure and the choice between bank debt and public debt’, Journal of Financial Economics 109, 109–517.
Liu, Q., Tian, G. (2012). ‘Controlling shareholder, expropriations and firm’s leverage decision: Evidence from Chinese Non–tradable share reform’, Journal of Corporate Finance 18, 18–782.
Lozano, M. B., Yaman, S. (2020). ‘The determinants of cash flow sensitivity of cash: The family ownership effect’, Research in International Business and Finance, 53, 101204.
Locorotondo, R., Dewaelheyns, N., and Van Hulle, C. (2014). Cash holdings and business group membership. Journal of Business Research, 67(3), 316–323.
Marchica, M. T., & Mura, R. (2010). Financial flexibility, investment ability, and firm value: evidence from firms with spare debt capacity. Financial management, 39(4), 1339–1365.
Maury, B., Pajuste, A. (2005). ‘Multiple large shareholders and firm value’, Journal of Banking and Finance 29, 29–1813.
Morck, R., Wolfenzon, D. and Yeung, B. (2005). ‘Corporate governance, economic entrenchment, and growth’, Journal of Economic Literature 43, 43–655.
Myers, S. C. (1984). ‘The capital structure puzzle’, The Journal of Finance 39, 39–574.
Myers, S.C., Majluf, N.S. (1984). ‘Corporate financing and investment decisions when firms have information that investors do not have’, Journal of Financial Economics 13, 13–187.
Opler, T., Pinkowitz, L., Stulz, R., Williamson, R. (1999). ‘The determinants and implications of corporate cash holdings’, Journal of Financial Economics 52, 52–3.
Palazzo, B. (2012). ‘Cash holdings, risk, and expected returns’, Journal of Financial Economics 104, 104–162.
Pindado, J., Requejo, I., de la Torre, C. (2011). ‘Family control and investment–cash flow sensitivity: Empirical evidence from the Euro zone’, Journal of Corporate Finance 17, 17–1389.
Riddick, L., Whited, T. (2009). ‘The corporate propensity to save’, The Journal of Finance 64, 64–1729.
Shleifer, A., Vishny, R.W. (1986). ‘Large shareholders and corporate control’, The Journal of Political Economy, 461–488.
Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. The journal of finance, 52(2), 737–783.
Shleifer, A., Wolfenzon, D. (2002). ‘Investor Protection and Equity Markets’, Journal of Financial Economics 66, 66–3.
Stein, J. C. (2003). Agency, information and corporate investment. Handbook of the Economics of Finance, 1, 111–165.
Stock, J.H., Wright, J.H., 2000. GMM with weak identification. Econometrica 1055–1096.
Subramaniam, V., Tang, T. T., Yue, H., & Zhou, X. (2011). Firm structure and corporate cash holdings. Journal of Corporate Finance, 17(3), 759–773.
Tinaikar, S. (2017). ‘Executive compensation disclosure and private control benefits: A comparison of US and Canadian dual class firms’, Journal of International Accounting, Auditing and Taxation 29, 32–51.
Tran, Q. T. (2020). ‘Corruption and corporate cash holdings: international evidence’, Journal of Multinational Financial Management 54, 100611.
Tsao, S. M., Chang, Y. W., Koh, K. (2017). ‘Founding Family Ownership and Myopic R&D Investment Behavior’, Journal of Accounting, Auditing & Finance 0148558X17704084.
Villalonga, B., & Amit, R. (2009). How are US family firms controlled?. The Review of Financial Studies, 22(8), 3047–3091.
Wei, K.C. J., Zhang, Y. (2008). ‘Ownership structure, cash flow, and capital investment: Evidence from East Asian economies before the financial crisis’, Journal of Corporate Finance 14, 14–118.
Whited, T., Wu., G. (2006). ‘Financial constraints risk’, Review of Financial Studies 19, 19–531.
Xu, N., Xu, X., & Yuan, Q. (2013). Political connections, financing friction, and corporate investment: Evidence from Chinese listed family firms. European Financial Management, 19(4), 675–702.
You, J., Lin, L., Huang, J., & Xiao, M. (2019). ‘When is cash king? International evidence on the value of cash across the business cycle’, Review of Quantitative Finance and Accounting 54(3), 1101–1131.
Zhong, L., Chourou, L. and Ni, Y. (2017). ‘On the association between strategic institutional ownership and earnings quality: Does investor protection strength matter?’, Journal of Accounting and Public Policy 36, 429–450.