Vertical Interlock And The Firm Investment

This dissertation examines the agency problem between majority and minority shareholders under the settings of business groups from a new perspective.In particular,when the listed company's executives also hold positions in its business group,will these vertically interlocked executives help preventing the shareholders' benefits upon the group profit-sharing? I choose to explore the influence of vertical interlock on firm investment.Firm investment is a big concept which conclude many aspects which are all tightly connected to agency problem.In this dissertation,I employ three aspects to test the agency problem within business group: Firstly,I make an investigation on the effect of vertical interlock on investment efficiency,this study shows that vertical interlock generally imposes negative impacts on investment efficiency.Such effects mainly manifest in aggravating under-investment.Majority literature investigates investment inefficiency through a mergers and acquisitions standpoint.This study further investigates the relationship between vertical interlock and related party M&As,I find that firms with vertical interlock experiences much lower subsequent buy-and-hold abnormal returns,which is not benefit for shareholders.Also,interlocking executives tend to buy assets targets with cash payment when they conduct related party M&As.I doubt that the cash resources could be diverted to business groups or misused by interlocking executives.Thus,this paper further checks whether vertical interlock discounts the value of cash for the firms by examining the relationship between vertical interlock and the value of cash holdings.I find that investors tend to value cash holdings in companies with vertical interlock substantially less than in those without.Overall,this dissertation applies the sample in China to explore the effect of vertical interlock on firm investment and finds that companies with vertical interlock tend negatively affect the firm investment of affiliated firms.The primary contribution is that I find vertical interlock could capture agency problems within business groups.The formation of vertical interlock allows interlocking executives to take instructions and act for the benefit of controlling shareholders ahead of the minority shareholders of the listed companies.Besides,vertical interlock now becomes a kind of business group characteristics for emerging markets to better supervise and control business group affiliates.This study sheds light on corporate governance and controlling mechanism within business group,especially for emerging markets.