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Differential Value of Cash Holdings According to Ownership–Control Disparity

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  • Hyunjung Choi

    (College of Global Management and Technology, Sungkyul University, Anyang 14097, Republic of Korea)

Abstract

This study verifies investor perceptions of cash holdings in companies with ownership–control disparities in the Korean stock market. The value of the cash held by a company varies with the level of information asymmetry. A high level of information asymmetry suggests a strong possibility of the controlling shareholder using the company’s cash to obtain private utility and harming other shareholders’ interests. Hence, investors evaluate the value of the company’s cash negatively. Greater disparity between ownership and control indicates a higher level of information asymmetry and the likelihood of agency problems, resulting in capital market investors evaluating the cash held negatively. This study uses Faulkender and Wang’s model to examine the value of the cash held by applying it to large corporations belonging to large corporate groups and their affiliates from 2011 to 2019. The level of disparity between the ownership and control of the controlling shareholder showed a significant negative relationship with the value of the cash held by the company. This suggests that in the capital market, investors evaluate the companies with a high disparity of ownership and control as having a higher possibility of agency problems and operating cash less efficiently. Therefore, these companies are unlikely to be properly valued.

Suggested Citation

  • Hyunjung Choi, 2024. "Differential Value of Cash Holdings According to Ownership–Control Disparity," Sustainability, MDPI, vol. 16(16), pages 1-11, August.
    • Handle: RePEc:gam:jsusta:v:16:y:2024:i:16:p:6774-:d:1451770
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