The Long-term Equity Investments Of Parent Company In Its Subsidiaries And The Financial Liquidity

Recent years, the phenomenon of the listed companies controlling their subsidiaries through long-term equity investment is becoming increasingly apparent. Operations of some listed companies gradually shifted to their subsidiaries, gradually weakening their own production and business activities, giving more emphasis on the controlling of major policy decisions and the operation of the subsidiaries. While our descriptive statistics find that, the company’s cash holdings will show significantly difference due to the structural difference. Compared to the no-long-term-equity investment-led companies, the long-term-equity-investment-led companies’ parent companies and consolidated entities hold less cash, and more obvious the long-term equity investment is, lower its cash holding is. Does this phenomenon mean that the parent-subsidiary structure of long-term-equity-investment-led itself can enhance the efficiency of cash holdings so that to generate the liquidity effect?The existing research explain why China’s listed companies holding high level of cash from two perspectives, financing constraints theory and agency theory. Under the financing constraints theory, the complementary effect of the cash flows of the Group’s internal capital market can reduce cash flow volatility, thereby weakening the precautionary motive of holding cash, that is to say, the internal capital markets eased financing constraints, a lower level of cash holdings will be accompanied by higher value. According to the agency theory, the low level of cash holdings may be the result of misuse of funds and over-investment, thus the lower level of cash holdings will be accompanied by damage of value. As to the above two theories explaining the liquidity effect of parent-subsidiary structure, which one is more powerful? This paper attempts to examine whether the parent-subsidiary structure of long-term-equity-investment-led can reduce the company’s cash holdings or not, and whether this performance will bring a enhancement to the value of cash holdings. And as a further analysis, my paper also attempts to examine whether the financial liquidity effect will be affected by the distribution of mobility between the parent companies and their subsidiariesThis study finds that:(1) the greater the long-term equity investment of the parent and subsidiary companies, the greater the liquidity effect, as the consolidated entities can holds less cash to meet their liquidity needs;(2) The less cash holdings above is not due to the internal capital markets’misuse of funds (agency theory), but the results of the rational allocation of the funds of parent companies and subsidiaries within the consolidated entities (financing constraints theory), thus, the greater the long-term equity investment of the parent and subsidiary companies, the greater the value of the cash holdings;(3) among the long-term-equity-investment-led companies, the more the liquidity focuses on parent companies, the more obvious the liquidity effect is.This paper is different from the traditional research on its specific perspective. Previous studies have explored the ownership arrangements and cash distribution in the parent-subsidiary structure from the perspective of corporate governance, the relationship between concentration of cash distribution and operating performance. But they only emphasized the differences in the distribution of liquidity between the parent and subsidiary companies, failed to note that the differences of parent-subsidiary structure will affect the overall level of liquidity. In addition, the existing researches on the financing constraints often consider the listed parent companies and their subsidiaries as a whole, ignoring the internal capital market among the groups.