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Controlling Shareholder Equity Pledge and Cash Holding: Tunneling or Takeover Avoidance

【Authors】
LI Changqing, XING Wei & LI Maoliang
【WorkUnit】
Xiamen University, 361005
【Abstract】

Utilizing the quarterly data of China A-share listed firms during the period of 2013—2015, this paper finds a U-shape relationship between the controlling shareholder equity pledge rate and corporate cash holdings. When the controlling shareholder equity pledge rate is lower than a critical value, 55%, firms will keep lower cash holdings because of tunneling In contrast, when the equity pledge rate is higher than the critical value, the controlling shareholders would prefer firms to hold more cash to avoid the risk of losing corporate control. The empirical evidence indicates that, for the firms with equity pledged by controlling shareholders, the impact of these controlling shareholders on the decision of corporate cash holdings depends on the pledge rates. This conclusion is robust after controlling over possible endogeneity issues. Further tests show that the Ushape relationship only exists in non-state-owned enterprises; the lower cash holding is accompanied by tunneling of controlling shareholders, and the higher cash holding is associated with lower corporate capital expenditure and lower cash dividends; and that while holding more cash could significantly reduce the possibility of margin call, the intervention from controlling shareholders on the decision of cash holdings is harmful to firm values.

JEL:G30, G32, G38

【KeyWords】
Equity Pledge, Cash Holding, Tunneling, Takeover Avoidance