Group-affiliations and corporate cash holdings: moderating role of political connectedness

Abstract

PurposeThis study examines the effect of business group affiliations on corporate cash holdings and how political connectedness modifies the relationship between business group affiliations and corporate cash holdings.Design/methodology/approachThe multiple ordinary least square regression with year dummies is used to estimate the effect of business groups on cash holdings. For moderating, the multiplicative term is used. The data from 252 non-financial firms listed on Pakistan Stock Exchange were collected for the analysis from 2010 to 2018.FindingsThe findings show that business group affiliations negatively affect corporate cash holdings, and political connection positively moderates this relationship. Business group firms that are politically connected hold less cash. The firm-specific factors such as leverage, size, cash flow, and dividend dummy also significantly affect corporate cash holdings.Practical implicationsThe results imply that affiliated companies have lessened financing frictions and improved stability in their expected future cash flows. Moreover, the results indicate that political connection minimizes the opportunity and agency costs linked to cash holdings.Originality/valueThis study contributes to the existing literature by examining the moderating role of political affiliations on the relationship between business groups and cash holdings in the emerging market.