Control-Ownership Wedge and the Value of Cash Holdings: Evidence from East Asian Corporations

Abstract

This study investigates the effect of the divergence between the cash flow rights and voting rights of controlling shareholders (henceforth the control-ownership wedge) on the value of cash holdings of corporations in nine East Asian countries. An agency framework implies that investors are more likely to discount the value of cash holdings of firms with a higher risk of an agency problem. Consistent with the predictions of this agency argument, a wider control-ownership wedge is found to be associated with a lower value for cash holdings. That is, corporate cash holdings contribute less to firm value when minority shareholders are more likely to be expropriated by controlling shareholders. An additional finding is that investors in countries with a stronger legal regime are more concerned about the rent extraction of controlling shareholders, resulting in greater discount in the value of cash holdings as the control-ownership wedge widens. The results suggest that investors under a strong legal regime are more sensitive to the possible rent-seeking behaviors of controlling shareholders.