Emerging Markets Review: C.P. Gupta, Prateek Bedi T

Emerging Markets Review 44 (2020) 100718
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Emerging Markets Review

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Corporate cash holdings and promoter ownership

T
C.P. Gupta, Prateek Bedi
⁎
Department of Financial Studies, Benito Juarez Marg, South Campus, University of Delhi, Delhi 110021, India
ARTICLE INFO ABSTRACT
Keywords: We examine the relationship between corporate cash holdings and promoter ownership for a
Corporate cash holdings sample of Indian non-financial firms. Consistent with the arguments of the ‘efficient monitoring
Promoter ownership hypothesis’, our results broadly suggest that promoter ownership is negatively associated with
Agency theory cash holdings, thereby highlighting the role of large owners in preventing cash accretion in an
Dynamic panel regression
emerging market context. Indicating prominent influence of corporate ownership on cash man
System GMM estimator
India
agement, we find that corporate non-promoter ownership is also negatively related with cash
holdings. With regard to promoter ownership of foreign entities, our results suggest that cash
holdings share a U-shaped relationship with ownership of foreign promoter corporations. In
addition, our findings provide weak evidence to support a more pronounced negative association
between cash holdings and promoter ownership for group-affiliated firms as compared to non-
affiliated firms since the former faces lower financial constraints on account of access to internal
capital markets. Finally, we perform long-term effect analysis in order to reinforce robustness of
our results.
1. Introduction
In general, corporate cash holdings have witnessed a pronounced rising trend across the world over the past two decades (Graham
et al., 2015; Paulo, 2018). The ‘2018 Global Finance Cash 25’ rankings reveal that the cut-off to prepare the list of world's top 25
corporate cash hoarders was registered at USD 24.4 billion, representing a massive growth of 50% over 2017's threshold of USD 16.3
billion.1 Contrastingly, Samaan and Schott (2016) note that cash holdings of non-financial firms in India have largely remained flat
over the period 1990–2012.2 This stark contrast in the evolution of cash holdings of Indian non-financial firms vis-à-vis their in
ternational counterparts presents an interesting opportunity to understand the dynamics of demand for cash balances in the Indian
context. In addition, the recent share buyback spree witnessed by the Indian corporate sector makes a compelling case for in
⁎
Corresponding author.
E-mail address: prateekbedi.du@gmail.com (P. Bedi).
1
The list of ‘Global Finance Cash 25’ ranks public non-financial companies by cash, cash equivalents and short-term securities (those maturing
between three months and a year) on their balance sheets. See https://www.gfmag.com/magazine/september-2018/global-finance-cash-25-2018
for details.
2
In fact, the average level of cash holdings of 1696 Indian non-financial firms examined in this study also remains fairly stable between 2001 and
2016 (please see Fig. 1).
https://doi.org/10.1016/j.ememar.2020.100718
Received 27 January 2020; Received in revised form 20 July 2020; Accepted 22 July 2020
Available online 30 July 2020
1566-0141/ © 2020 Published by Elsevier B.V.
C.P. Gupta and P. Bedi Emerging Markets Review 44 (2020) 100718
vestigation of cash holdings of Indian firms. With an increase of approximately 300%, the value of corporate share buybacks3 in India
surged from USD 1.35 billion during 2001–07 to USD 5.29 billion during 2010–16,4 thereby signifying a strong trend of cash
distribution in Indian firms.
A notable characteristic of the Indian corporate sector is dominant presence of promoters or controlling shareholders5 with
considerable equity ownership (see Kaur and Gill, 2009 and Balasubramanian and Anand, 2013 for a discussion on evolution of
ownership structure in Indian firms). This is in sharp contrast to corporate shareholding patterns in developed economies such as the
U.S. and the U.K. which feature relatively high levels of dispersed ownership as compared to emerging markets. Further, the Indian
corporate sector is characterised by pyramiding structure of corporate ownership. Marked by cross-holdings of equity ownership,
such structures allow controlling shareholders to own low equity ownership in the firm while retaining adequate control over the
management. Keeping in view the stable level of corporate cash holdings and substantial concentration of ownership in the hands of
promoters in the Indian corporate sector, we examine the association between corporate cash holdings and promoter ownership for a
large sample of Indian non-financial firms over the period 2001–2016.6
The relationship between cash holdings and promoter ownership becomes particularly integral and relevant in the context of
Indian corporate sector. Free cash flow theory postulated by Jensen (1986) underlines the agency conflicts between managers and
shareholders, and propounds that managers can build up excessive cash holdings for personal benefits. Further, self-interested
managers may utilise corporate resources for private benefit at the expense of shareholders' interests. For instance, in an attempt to
explain the motivation behind accumulation of excess cash by management, Opler et al. (1999) note that firms tend to hold excess
cash when outside shareholders are highly dispersed. In this regard, a potential solution to agency conflicts is presence of large
shareholders who plausibly act as efficient monitors (Pound, 1988). This phenomenon is known as the ‘efficient monitoring hy
pothesis’. Shleifer and Vishny (1986) also expect that large shareholders can serve the purpose of monitoring the management and
bring about value-enhancing changes in corporate policies. Thus, in accordance with the ‘efficient monitoring hypothesis', cash
holdings should be negatively related to promoter ownership.
However, firms in emerging markets are also characterised by ‘principal-principal conflict’. Young et al. (2008) note that prin
cipal–principal conflicts between controlling shareholders and minority shareholders result from concentrated ownership, extensive
family ownership and control, business group structures and weak legal protection of minority shareholders. With a view to ex
propriate liquid assets for private benefits, promoters may pursue cash hoarding and increase their personal wealth through ‘tun
neling’ (Pinkowitz et al., 2006). ‘Tunneling’ refers to the transfer of corporate resources out of the firm for the benefit of controlling
shareholders. In the context of corporate cash management, promoters may not prefer distribution of excess cash holdings in order to
retain their control over the same. Hence, in consonance with ‘tunneling hypothesis’, cash holdings should be positively associated
with promoter ownership. In this study, we empirically examine these two competing hypotheses for a sample of Indian non-financial
firms for the period 2001–2016.
In order to emphasize the relevance of disparity in the level of monitoring and control exercised by different types of promoters,
we study the relationship between corporate cash holdings and promoter ownership separately for promoters with diverse geo
graphical and institutional identities. In particular, we investigate the relationship of cash holdings with promoter ownership of
Indian promoters (overall), Indian banks and financial institutions, Indian corporate bodies, Indian central and state governments,
foreign promoters (overall), foreign non-resident Indians (NRIs) and foreign corporate bodies. In addition, we also examine linkages
between corporate cash holdings and non-promoter ownership. Since equity holdings (in percentage terms) of promoters and non-
promoters add up to 100% by construction, an increase in ownership of either of these categories is associated with a decrease in the
other. Hence, our expectation of a negative relationship between cash holdings and promoter ownership entails a hypothesis of
positive association between cash holdings and non-promoter ownership. However, the presence of institutional investors in a firm
suggests a possibility of an effective governance mechanism (Aggarwal et al., 2011; Eaton et al., 2014). In this regard, monitoring and
supervision by non-promoter institutional investors may also prevent accumulation of liquid assets by managers. To this extent, we
also hypothesize a negative relationship between cash holdings and non-promoter ownership. Further, we examine this relationship
separately for equity ownership held by various types of non-promoters including institutions (overall), mutual funds, corporate
bodies, foreign institutional investors (FIIs) and small individual investors.
Most Indian firms are owned by family business groups (please see Narayanaswamy et al., 2012; Bang et al., 2018 for an excellent
discourse on family business groups in India). Cross-holdings, interlocking directors and common managerial personnel are some key
features of business groups. On account of interconnections through formal or informal channels, firms affiliated to business groups
are better positioned to leverage production, investments and information. More importantly, such firms can benefit from within-
group internal capital markets by supporting each other financially through intra-group loans and cash-transfers (Gopalan et al.,
2007). Keeping in view the dominant presence of business groups and pyramiding structure of corporate ownership in India, we
3
See https://www.livemint.com/Money/LAKl4VcG9hi0TSm5wUXUGO/Share-buybacks-poised-to-climb-to-a-record-Rs48000-crore-in.html for
details.
4
The data correspond to the directory on share buybacks in India maintained by Prime Database. See https://www.primedatabase.com/buy_
demo.asp for further information. We assume that USD 1 = INR 65.
5
Promoters are often referred to as ‘controlling shareholders’ in empirical studies (Chauhan et al., 2016). In fact, we also consider ‘controlling
shareholders’ and ‘promoters’ as the same entity in this paper.
6
Spread over 16 years, our sample dataset covers a longer time frame in comparison to empirical studies on corporate cash holdings of Indian
firms (Bhat and Bachhawat (2005); Bhaduri and Kanti, 2011; Anand et al., 2012; Maheshwari and Rao, 2017; Roy, 2018; Anand et al., 2018;
Chauhan et al., 2018; Rao and Thaker, 2018; Ranajee and Pathak, 2019; Arora, 2019; Jadiyappa et al., 2020).
2
examine the effect of business group affiliation on relationship between cash holdings and promoter ownership.
Our study contributes to the extant literature on corporate cash holdings in multiple ways. First, our findings show a negative
relationship between corporate cash holdings and promoter ownership, thereby providing empirical support to the ‘efficient mon
itoring hypothesis’ in the context of corporate cash management. Moreover, our results provide contradictory evidence in relation to
prior studies which document a positive association between cash holdings and promoter ownership (Anand et al., 2012; Ranajee and
Pathak, 2019; Arora, 2019). In addition to consolidated measure of promoter ownership, we find cash holdings to be negatively
associated with promoter ownership of Indian corporate bodies. Thus, our results indicate that promoters may either directly par
ticipate in the decision making process or guide the actions of managers in an advisory role to impede cash accretion on corporate
balance sheets.
Interestingly, we find a U-shaped relationship between cash holdings and promoter ownership of foreign corporate bodies.
Specifically, for a unit increase in promoter ownership of foreign corporate bodies, cash holdings initially decrease (till promoter
ownership of foreign corporate bodies reaches a level of 32.25%, ceteris paribus) and subsequently increase. As promoter ownership
of foreign corporate bodies reaches higher levels, the subsequent uptrend in cash holdings may be a result of ‘tunneling’ or foreign
corporations' response to a possibility of shortage of funds due to financial frictions in case of an emerging market like India. From
another perspective, this result also lends empirical support to tax motive of holding cash (Foley et al., 2007; Faulkender et al., 2019)
since foreign promoter corporate bodies may choose to avoid repatriation of excess cash due to tax payments associated with the
same. Taken together, these results show that cash holdings and promoter ownership are negatively related and that this association
may not remain consistent across ownership of different types of promoters. In this regard, our findings have broader implications for
corporate cash management in emerging markets as the existent literature documents presence of a large owner with a controlling
direct interest in listed companies in these markets (please see Claessens and Yurtoglu, 2013). On account of such ownership con
centration in emerging markets, accumulation of liquid assets by managers may potentially be prevented by control and monitoring
exercised by the large owner (or a few large owners acting in concert).
Second, our findings provide fresh insights regarding association between cash holdings and non-promoter ownership. In par
ticular, we document that cash holdings rise with an increase in non-promoter ownership (overall), institutional non-promoter
ownership and non-promoter ownership of mutual funds. These findings indicate that institutional non-promoters may not have
adequate incentives and control to prevent build-up of liquid assets in Indian non-financial firms, potentially due to their lower
quantum of ownership and short investment horizon. However, we find that cash holdings are negatively related with non-promoter
ownership of corporate bodies, thereby indicating that corporate bodies tend to prevent cash accumulation irrespective of the nature
(promoter or non-promoter) of their ownership. In sum, we contribute to the literature by examining relationship of cash holdings
with non-promoter ownership and showing that the direction of this relationship may change across different types of non-promoters.
Third, our results provide limited evidence to indicate that the negative relationship between cash holdings and promoter
ownership is more pronounced for group-affiliated firms as compared to non-affiliated firms. In other words, a unit increase in
promoter ownership is associated with a greater reduction in cash holdings for group-affiliated firms than non-affiliated firms.
Specifically, we find this result to be valid only in case of ownership of foreign promoter corporate bodies. The existent literature
postulates that cash holdings are lower for group-affiliated firms as compared to non-affiliated firms on account of former's access to
internal capital markets (Locorotondo et al., 2014; Cai et al., 2016). Extending this argument further, our findings reveal that an
increase in promoter ownership might entail a greater reduction in cash holdings for group-affiliated firms as compared to non-
affiliated firms, potentially because group firms may support each other financially in times of distress (Gopalan et al., 2007). Finally,
in order to examine robustness of our results, we capitalise on dynamic panel regressions to study long-term effects of our variables of
interest on cash holdings.7 The long-term coefficients of our variables of interest are found to be consistent with their short-term
counterparts. In addition, we employ t statistic (instead of Z statistic) for the purpose of hypothesis testing due to a considerable
reduction in firm-year observations in some of our models. In summary, the present study provides fresh insights on relationship of
cash holdings with ownership of various types of promoters and non-promoters, thereby contributing to the extant literature on
determinants of corporate cash holdings.
The remainder of this paper is structured as follows. Section 2 presents a background of the Indian market and institutional
framework. Section 3 provides an elaborate discussion on related literature and research hypotheses. Section 4 explains the data set
and methodology used in this study. Section 5 presents empirical findings. Section 6 describes robustness checks. Section 7 concludes
the paper.
2. Overview of Indian market and institutional environment
With an average GDP growth rate of 7.11% per annum over the period 2009–2018, India ranks seventh in the list of world's
largest economies.8 In India, macroeconomic dynamics such as high GDP growth rate (and consequently, more investment
7
Analysis of long-term effects of determinants of cash holdings is virtually absent in existent literature. In studies which employ dynamic panel
regressions to find determinants of corporate cash holdings (Ozkan and Ozkan, 2004; Guariglia and Yang, 2016; Jebran et al., 2019), we notice a
pervasive focus on the short run coefficients of explanatory variables. To the best of our knowledge, only Loncan (2018) calculates the long-term
effect of explanatory variable of interest (i.e. foreign institutional ownership) on cash holdings.
8
Figures have been taken from World Bank national accounts data and OECD National Accounts data files. For details, please see https://
databank.worldbank.org/reports.aspx?source=2&series=NY.GDP.MKTP.KD.ZG&country=IND and https://databank.worldbank.org/data/
3
opportunities), inflationary pressure, volatile exchange rate and regulatory uncertainty warrant a high precautionary demand for
liquid assets in relation to developed economies. In relation to institutional environment, the legal system in India follows English
common law which aims to safeguard interests of shareholders and creditors. However, the enforcement of legal norms and reg
ulations is relatively weak in India as compared to developed nations such as the U.S. and the U.K. Although the government has a
wide range of powers under the corporate law, such powers are seldom exercised to penalise firms for violation of governance norms
(Balasubramanian et al., 2010). With a much developed financial market, India boasts of two prominent stock exchanges – Bombay
Stock Exchange (BSE) and National Stock Exchange (NSE) which serve as a trading platform for more than 4100 and 1600 listed
companies respectively.9 The Securities and Exchange Board of India (SEBI) serves as the primary regulator for listed companies in
India. Committed to the task of safeguarding interests of shareholders, SEBI has been instrumental in developing regulations with
regard to corporate governance and investor protection (see Narayanaswamy et al., 2012 for an overview of corporate governance
landscape in India). In addition, financial reporting and disclosure practices of listed firms are governed by Companies Act, 2013.
For the purpose of this study, we adopt the concept and definition of ‘promoter’ as laid down by SEBI and Companies Act, 2013.
According to SEBI's Disclosure and Investor Protection Guidelines, 2000, a promoter (or a group of promoters) exercises sufficient
control over the company by virtue of shareholding and management rights. As per Section 2 (69) of the Companies Act, 2013, a
promoter is defined as a person:
(a) who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or
(b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or
(c) in accordance with whose advice, directions or instructions the board of directors of the company is accustomed to act (provided
that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity).
3. Literature review and hypotheses development
Ownership structure is central to corporate governance in any institutional setting. As postulated by the type I agency problem, a
conflict of interest exists between shareholders and managers. Without effective control procedures, managers are likely to take
actions that deviate from the interests of the residual claimants i.e. shareholders (Fama and Jensen, 1983). The shareholding pattern
of a firm plays a crucial role in controlling the implications of agency conflicts. Since financial systems and formal institutions are not
adequately defined in emerging economies, the market for corporate control is relatively underdeveloped. Therefore, firms in
emerging economies may rely on controlling shareholders to prevent exploitation of corporate resources by self-interested managers.
In contrast, a striking and well-documented aspect concerning the ill-effects of concentrated ownership in emerging markets
relates to a conflict of interest between majority shareholders (or controlling shareholders) and minority shareholders. This conflict is
known as principal-principal conflict or type II agency problem (please see Young et al., 2008 for a detailed review). In a principal-
principal conflict, concentrated ownership combined with an absence of effective external governance mechanism, results in conflicts
between controlling shareholders and minority shareholders (Morck et al., 2005). According to Shleifer and Vishny (1997), large
owners may prefer to use firms to generate private benefits of control that are not shared by minority shareholders. In this regard,
Johnson et al. (2000) use the term ‘tunneling’ to describe the transfer of assets and profits out of firms for the benefit of those who
control them. Faccio et al. (2009) note that a controlling shareholder may expropriate minority shareholders by intra-group trans
actions. Similarly, Casado et al. (2015) show that ownership concentration leads to lower shareholder protection and thus a higher
risk of rent extraction at the expense of small shareholders. Further, Li et al. (2015) find that a decline in ownership concentration
strengthens the positive influence of board independence on firm performance. In addition, Liu and Tian (2012) find that controlling
shareholders' tunneling activities may cause value-destroying excess leverage policy.
According to existent theoretical and empirical literature, performance and risk-taking behaviour of a firm is determined by the
type of shareholder who controls the firm (Berger et al., 2005; Iannotta et al., 2013). In this regard, McConnell and Servaes (1990)
acknowledge that while some block-holders may be entirely passive, active block-holders may perform a monitoring role. Further,
different types of shareholders differ in their strategic priorities, investment horizon, growth objectives, orientation towards risk,
preferences for resource allocation and ability to monitor managers. In the same way, the nature and extent of impact of promoter
ownership on corporate cash holdings may vary across different types of promoters. In fact, the motivation and rationale for par
ticipation of shareholders in corporate activities may depend on the level of ownership held by them in the firm and their investment
horizon.
3.1. Corporate cash holdings and promoter ownership
We focus on three crucial aspects of equity shareholding by promoters in the Indian corporate sector in order to build our research
hypotheses. First, we emphasize the quantum of promoter ownership in Indian non-financial firms. We consider concentrated
ownership in the hands of promoters as analogous to the presence of block-holders (i.e. large shareholders) in a firm. Since listed
(footnote continued)
download/GDP.pdf
9
This information was retrieved from https://www.bseindia.com/corporates/List_Scrips.aspx and https://www.nseindia.com/corporates/
content/securities_info.htm on July 10, 2020.
4
firms in the Indian corporate sector are characterised by strikingly high levels of equity stake held by promoters (Chakrabarti et al.,
2008), we extend arguments associated with large shareholder activism to promoter ownership. Second, we accentuate the invest
ment horizon of promoters. Keeping in view the strategic nature of promoter ownership, promoters may be considered as long-term
investors who are concerned about appreciation of firm value in the long run. To this extent, we use the existent theoretical un
derpinnings of behaviour of long-term investors in order to postulate linkages between corporate cash holdings and promoter
ownership. Third, we consider the possibility of tunneling of liquid assets by controlling shareholders at the expense of minority
shareholders. On account of potential principal-principal conflicts in the Indian corporate sector, we examine the association between
cash holdings and promoter ownership from the standpoint of ‘tunneling hypothesis’ which posits that controlling shareholders may
expropriate corporate resources for personal gains.
3.1.1. Quantum of promoter ownership

Indian firms are distinguished by substantial ownership of promoters. A significant strand of corporate finance literature un
derscores the monitoring role of block-holders (see Agrawal and Mandelker, 1990; Holderness, 2003; Edmans, 2014; Edmans and
Holderness, 2017). The role of large shareholders in exercising control over the management and reducing agency conflicts is
highlighted by the ‘efficient monitoring hypothesis’ (please see Sarkar and Sarkar, 2000). According to the arguments of this hy
pothesis, large shareholders are likely to be more efficient (as compared to small and dispersed shareholders) in monitoring man
agerial actions due to their considerable investment and substantial voting power to guide corporate decisions (Sarkar and Sarkar,
2000). Further, large shareholders are in a position to mitigate the collective action problem faced by dispersed shareholders (Becht
et al., 2003).
Firms may be classified into two categories: owner-controlled and management-controlled. A firm is considered as owner-con
trolled if a specific stockholding entity owns a dominant share of equity. On the contrary, a firm is considered as management-
controlled if shareholdings are so dispersed that no single stockholder or a coalition of stockholders can control the firm. With regard
to corporate cash holdings, Gadhoum (1999) documents evidence in support of large shareholder activism as he finds a positive
relationship between holdings of the largest block-holder and cash distribution in the form of dividends. Further, the author notes
that powerful shareholders ensure managerial efficiency by using dividends to influence a firm's strategic development since dividend
payments subject managers to discipline and control of capital markets on account of external financing.
Due to a considerable dominance of family business groups in the Indian corporate sector, promoters usually comprise the original
founder of the business group and member(s) of the founding family. In this regard, Short (1994) notes that equity ownership by the
original founder or member(s) of founding family of a firm may have different effects on firm performance as compared to directors
in general. Along similar lines, Morck et al. (1988) also argue that a founder may exert more control over the firm at any given level
of ownership than other members of the board and may become entrenched at much lower levels of ownership than other owner-
managers. Thus, keeping in view the theory and evidence concerning influence of large shareholders and founder(s) on corporate
policies, cash holdings should be negatively associated with promoter ownership.
3.1.2. Investment horizon of promoters

With regard to the investment horizon of promoters, we draw inspiration from existent literature which discusses the role and
orientation of long-term investors (such as promoters) in guiding corporate decisions (see Garel, 2016 for effects of investor horizon
on corporate policies). The exploitation of corporate resources for extraction of private benefits by managers is more likely to harm
long-term investors than short-term investors since the impact of such managerial behaviour on firm value is realised over an
extended period of time. Therefore, long-term investors have a high incentive to monitor managers. For multiple reasons, long-term
investors are better positioned to prevent squandering of firms' assets by managers.
First, it is relatively less costly for long-term investors (than short-term investors) to acquire information about operational and
financial decisions of managers because the costs of such acquisition are amortized over a longer period of time. Second, long-term
investors may be interested in long-term profits. Accordingly, such investors are expected to intervene more in corporate decisions
since they are more likely to realize corresponding benefits (McCahery et al., 2016). Further, long-term investors may communicate
their standpoint regarding a firm's corporate governance practices or strategic decisions to the management in two ways (Hirschman,
1970). First, long-term investors may directly engage with management and voice their concerns. Second, long-term investors may
also use threat to exit the firm as an alternative to regulate and govern managers' conduct (Admati and Pfleiderer, 2009; McCahery
et al., 2016). In a recent empirical study, Cleary and Wang (2017) argue that presence of long-term institutional investors in a firm
enhances monitoring and improves information disclosures, thereby resulting in alleviation of information asymmetry problems
(Elyasiani and Jia, 2010) and reduction in agency costs. Moreover, the author finds that firms with a large base of long-term investors
hold less cash. In consonance with these theoretical arguments and empirical findings, we contend that on account of long-term
investment horizon of promoters, corporate cash holdings should be negatively associated with promoter ownership.
3.1.3. Tunneling hypothesis

Contrary to the arguments concerning quantum of ownership and investment horizon of promoters, we now consider a distinct
perspective to postulate linkages between corporate cash holdings and promoter ownership in the context of Indian corporate sector.
In accordance with principal-principal conflicts, a significant strand of corporate finance literature presents evidence to suggest that
controlling families in emerging markets have a strong incentive to expropriate minority shareholders and pursue private benefits. In
contrast to other assets, cash and cash equivalents may be transformed into private benefits at lower costs (Myers and Rajan, 1998).
Furthermore, Pinkowitz et al. (2006) argue that controlling shareholders may prefer to hold liquid assets since such assets can be
5
invested in projects that benefit controlling shareholders personally. In fact, Liu et al. (2015) examine a sample of listed firms in
China and find that family firms with more excess control rights hold more cash which is mainly tunneled by controlling shareholders
instead of being invested or distributed to shareholders as dividends. On account of controlling ownership of promoters in majority of
Indian firms, we consider the possibility of expropriation of liquid assets by promoters in accordance with the arguments of the
tunneling hypothesis. Thus, according to the tunneling hypothesis, cash holdings should be negatively associated with promoter
ownership.
Taken together, consistent with the arguments of the ‘efficient monitoring hypothesis’, we hypothesize a negative relationship
between cash holdings and promoter ownership on account of substantial quantum of ownership and long-term investment horizon
of promoters. In addition, based on the arguments of the ‘tunneling hypothesis’ we also hypothesize a positive association between
cash holdings and promoter ownership to test implications of principal-principal conflicts in the Indian corporate sector. Thus, we
consider the following testable hypotheses for examination in this study.
H1a. : The level of corporate cash holdings is negatively related to promoter ownership.
H1b. : The level of corporate cash holdings is positively related to promoter ownership.
In addition to the association between cash holdings and overall promoter ownership, we examine the relationship of corporate
cash holdings with promoter ownership held by different types of promoters namely Indian promoters (overall), Indian banks and
financial institutions, Indian corporate bodies, Indian central and state governments, foreign promoters (overall), non-resident
Indians (NRIs) and foreign corporate bodies.
In order to develop a thorough understanding of linkages between ownership structure and corporate liquidity, we also examine
association between corporate cash holdings and non-promoter ownership. By construction, an increase in promoter ownership
implies a decrease in non-promoter ownership and vice-versa. Therefore, since we expect cash holdings and promoter ownership to
be negatively related, non-promoter ownership and cash holdings should be positively related since non-promoters, in general, have a
relatively low quantum of ownership and short investment horizon as compared to promoters. However, the identity and nature of
non-promoter ownership may also play a crucial role in determining the orientation of non-promoters towards corporate cash
holdings. For instance, institutional non-promoters may be incentivised to monitor corporate cash decisions and prevent accumu
lation of liquid assets on account of their long-term investment horizon. Thus, we build two separate sets of arguments to develop our
hypotheses regarding association between cash holdings and non-promoter ownership.
On the one hand, cash holdings and non-promoter ownership may be positively related for multiple reasons. First, in contrast to
high levels of promoter ownership in Indian listed firms, the quantum of non-promoter ownership is relatively low. Thus, the
incentive to monitor and supervise actions of the management is lesser for non-promoters than promoters. Second, non-promoters
generally (with the exception of institutional non-promoters) exhibit characteristics of a financial investor considering that they do
not hold their shares with a long-term investment horizon. Further, Hao (2014) notes that shareholders with a short-term investment
horizon have less incentive to monitor managers. Extending this argument to corporate cash management, it is reasonable to expect
that non-promoters may not exert sufficient pressure on management to distribute (or invest) excess cash.
On the other hand, non-promoters can include such institutional investors who have adequate capacity and incentive to monitor
the management due to their long-term investment horizon. This efficient monitoring by institutional investors may induce a negative
association between cash holdings and non-promoter ownership. The monitoring role of institutional investors is discussed by Pound
(1988). Moreover, the monitoring role of institutional investors is also highlighted by several past studies (McConnell and Servaes,
1990; Smith, 1996). Prior research also shows that institutional investors can influence managerial decisions by voicing their opinion
and threatening to exit (Hirschman, 1970; Admati and Pfleiderer, 2009). In line with these arguments, we expect that institutional
non-promoters may leverage their control and expertise to impede accretion of liquid assets on corporate balance sheets.
On account of the above-mentioned arguments, we postulate the following combination of diverse hypotheses regarding re
lationship between cash holdings and non-promoter ownership.
H2a. : The level of corporate cash holdings is positively related to non-promoter ownership.
H2b. : The level of corporate cash holdings is negatively related to non-promoter ownership.
In addition to the association between corporate cash holdings and overall non-promoter ownership, we investigate the re
lationship of corporate cash holdings with non-promoter ownership held separately by institutions (overall), mutual funds, corporate
bodies, foreign institutional investors and small individual investors.
3.2. Relationship between corporate cash holdings and promoter ownership: Role of business group affiliation
A business group consists of legally independent firms which are bound together by formal and informal linkages and controlled
by a common owner. The distinct legal identity of business group affiliates enables them to procure funds from external capital
markets and upholds their limited liability in case of failure of a fellow group firm. In addition, one of the most important char
acteristics of group firms (which differentiates them from non-affiliated firms) is access to internal capital markets of the business
group through which financial resources are transferred among group affiliates. The extant literature provides sufficient empirical
evidence to show that group-affiliated firms hold significantly lower levels of liquid assets compared to their non-affiliated coun
terparts (Lin et al., 2019; Ranajee and Pathak, 2019). In addition to alleviation of financial constraints and enhancement of access to
external capital markets (Schiantarelli and Sembenelli, 2000), group affiliation also facilitates conducive negotiability of debt
6
contracts and debt guarantees (Chang and Hong, 2000). Extending this line of argument further, we examine the influence of business
group affiliation on relationship between corporate cash holdings and promoter ownership. In this regard, we examine the following
research hypothesis.
H3. : The relationship between corporate cash holdings and promoter ownership is moderated by business group affiliation.
4. Data and methodology
We collect data from ProwessIQ database10 maintained by Centre for Monitoring Indian Economy (CMIE) Private Limited for the
period 2001–2016. To begin with, we consider firms listed on Bombay Stock Exchange (BSE). While selecting our sample, we exclude
financial firms, foreign firms and government firms due to their idiosyncratic requirements for holding liquid assets. Next, we remove
firms with missing data values in excess of 10% for control variables. In order to alleviate the effect of extreme observations, we trim
top and bottom 1% observations of all relevant firm-specific continuous variables. Thus, our unbalanced panel dataset is narrowed
down to 1696 Indian non-financial firms. Finally, our data values correspond to standalone annual financial statements for all
variables used in the study. Appendix A.1 provides details pertaining to definition, abbreviation and period of data availability for all
variables used in this study.
4.1. Descriptive statistics
We report descriptive statistics for pooled data of continuous variables in Table 1. The mean and median of cash holdings (Cash/
TA) of Indian non-financial firms are reported as 4% and 1.9% respectively over the period 2001–2016. Highlighting the peculiarity
of corporate liquidity levels in Indian non-financial firms, these figures are substantially low compared to other economies around the
world (see Iskandar-Datta and Jia, 2012; Chen et al., 2019 for a relevant comparison). Further, we find cash holdings to be positively
skewed and considerably leptokurtic, thereby indicating presence of companies with sizeable amounts of cash and cash equivalents as
part of their total assets.
As a testimony to the peculiar ownership structure of Indian firms, promoter ownership is found to be substantially high with
mean and median measured at 50.7% and 51.1% respectively. With regard to the geographical identity of owners, Indian promoters
dominate with an average (median) shareholding of 46.4% (47.3%). In contrast, the median of foreign promoter ownership is
measured at just 2.2% while a high positive skewness results in an average shareholding of 10.4% for foreign promoters. With regard
to organisational identity of promoters, the mean and median shareholding of corporate bodies in the Indian (foreign) promoter
segment is recorded as 28.3% (17.7%) and 26.5% (8.5%) respectively. In the Indian promoter segment, we notice strikingly low
levels of average ownership by banks and financial institutions as well as central and state governments. Likewise, non-resident
Indians (NRIs) also exhibit a low average ownership in the foreign promoter category. In the non-promoter segment, the mean
shareholding of mutual funds, corporate bodies and foreign institutional investors is measured at 2.2%, 9.7% and 5% respectively.
For non-promoter small investors, we note a tangible level of ownership with a mean (median) of 20% (18.2%). Finally, we un
derscore the low number of firm-year observations for ownership by two entities in the Indian promoter segment – banks and
financial institutions as well as central and state governments. Similarly, as can be seen in Table 1, our sample has particularly less
data points for all three categories corresponding to ownership by foreign promoters. To this extent, we consider our findings
concerning these variables to be indicative (and not conclusive) of empirical reality.
4.2. Methodology
In consonance with dynamic behaviour of corporate cash holdings, we employ system generalised method of moments (GMM)
estimator developed by Arellano and Bover (1995) and Blundell and Bond (1998) in all regression models of this study.11 The system
GMM estimator is an extension of difference GMM estimator developed by Arellano and Bond (1991). In difference GMM estimator,
an equation of first-differenced variables is estimated by using lagged level values of variables as instruments. The system GMM
estimator augments difference GMM estimator by building a system of two equations – the original equation with level values of the
variables (for which the lags of first-differenced observations serve as instruments) and the transformed equation with first-differ
enced observations (for which the lags of level values of variables serve as instruments). By introducing additional instruments for
model estimation, the system GMM estimator improves precision and reduces bias of the estimates compared to the difference GMM
estimator (Blundell et al., 2001).
In line with existent literature (Anand et al., 2012; Al-Najjar, 2013; Locorotondo et al., 2014; Loncan, 2018; Anand et al., 2018),
we employ a range of control variables and use the following base specification for estimating dynamic panel regression models in
this study.
10
ProwessIQ database can be accessed at https://prowessiq.cmie.com/.
11
In Appendix A.2 of the paper, we provide the theoretical motivation to establish that dynamic trade-off model is better suited for modelling
empirical behaviour of corporate cash holdings as opposed to static trade-off model. Moreover, we also explain the advantages of system GMM
estimator in comparison to the widely used fixed-effects estimator.
7
Table 1
Descriptive statistics of variables used in the study.
Variables Mean Minimum 25th Percentile Median 75th Percentile Maximum Std. Dev. Skewness Kurtosis Count
Cash/TA 0.040 0.000 0.008 0.019 0.045 0.388 0.057 2.897 12.759 25,896
Size 6.905 3.059 5.524 6.779 8.128 11.777 1.796 0.315 2.509 26,429
Leverage 0.297 0.000 0.121 0.289 0.441 0.999 0.211 0.443 2.674 26,243
Liquidity 0.125 −0.558 0.000 0.118 0.259 0.648 0.191 −0.114 3.339 25,823
Profitability 0.071 −0.259 0.031 0.068 0.110 0.366 0.077 −0.033 5.061 24,238
Growth potential 0.811 0.080 0.447 0.638 0.914 5.354 0.663 2.977 14.633 23,517
Cash flow 0.063 −0.310 0.004 0.059 0.117 0.617 0.104 0.423 5.592 26,025
Capex 0.053 0.000 0.010 0.031 0.073 0.351 0.061 1.919 6.938 24,128
CF volatility 0.034 0.000 0.008 0.018 0.042 0.311 0.044 2.767 12.526 25,899
Promoter 0.507 0.073 0.394 0.511 0.632 0.898 0.167 −0.177 2.493 25,481
Indian promoter 0.464 0.018 0.337 0.473 0.599 0.894 0.184 −0.204 2.414 24,992
Indian prom_Banks & FIs 0.004 0.000 0.000 0.000 0.000 0.176 0.021 5.956 39.986 1342
Indian prom_Corporates 0.283 0.000 0.105 0.265 0.436 0.750 0.199 0.394 2.181 12,251
Indian prom_Govt. 0.016 0.000 0.000 0.000 0.000 0.341 0.056 3.954 18.000 1396
Foreign promoter 0.104 0.000 0.000 0.022 0.154 0.744 0.157 1.812 5.694 5601
Foreign prom_NRIs 0.040 0.000 0.000 0.004 0.046 0.498 0.074 2.737 11.816 2234
Foreign prom_Corporates 0.177 0.000 0.005 0.085 0.260 0.755 0.206 1.186 3.382 1696
Non-promoter 0.491 0.101 0.367 0.487 0.602 0.935 0.166 0.188 2.528 25,527
Non-prom_Institutions 0.071 0.000 0.002 0.025 0.104 0.455 0.098 1.710 5.329 20,401
Non-prom_MFs 0.022 0.000 0.000 0.003 0.030 0.177 0.035 1.942 6.316 14,699
Non-prom_Corporates 0.097 0.002 0.035 0.070 0.131 0.473 0.086 1.594 5.653 24,971
Non-prom_FIIs 0.050 0.000 0.000 0.012 0.701 0.364 0.074 1.836 5.855 10,621
Non-prom_Small investors 0.200 0.013 0.119 0.182 0.270 0.582 0.116 0.729 3.115 16,098
This table provides descriptive statistics of pooled observations of variables used in the analyses. We do not present summary statistics of ‘Dividend
payment’ and ‘Business group affiliation’ because these are dummy variables. Details regarding abbreviation and measurement of variables are
presented in Appendix A.1.
(Cash/TA)i,t = + (Cash/TA) i,t 1 + 1 Size i,t + 2 Leveragei,t + 3 Liquidityi,t + 4 Profitabilityi,t + 5 Growth potential i,t
+ 6 Cash flowi,t + 7 Dividendi,t + 8 Capex i,t + 9 CF volatilityi,t + 10 Ownershipi,t + i,t (1)
where, α is intercept term. i is firm identifier and t is time identifier. δ is regression coefficient of lagged value of cash holdings. βk
represents regression coefficient corresponding to kth explanatory variable. ‘Ownership’ signifies equity ownership of an entity which
forms variable of interest in the concerned model. εi, t represents the conventional error term.
Within the framework of system GMM estimator, Eq. (1) is also known as original equation. The original equation is first-
differenced to obtain the transformed equation as given below.
(Cash/TA)i,t = (Cash/TA)i,t 1 + 1 Size i,t + 2 Leveragei,t + 3 Liquidityi,t + 4 Profitabilityi,t + 5 Growth potential i,t
+ 6 Cash flowi,t + 7 Dividendi,t + 8 Capex i,t + 9 CF volatilityi,t + 10 Ownershipi,t + i,t (2)
By making use of first-difference operators, the system GMM estimator wipes out time-invariant unit-specific unobserved het
erogeneity (i.e. firm fixed effects in our case) from the first-differenced equation.
In order to deal with the consequences of endogeneity (in the form of biased and inconsistent estimates) due to simultaneous
relationships between cash holdings and its determinants, we consider six explanatory variables namely leverage, liquidity, dividend
payment, capital expenditure, profitability and growth potential as endogenous in all regression models.12 The endogenous re
lationship between leverage and cash holdings is well documented in existent literature (see Acharya et al., 2007 for a detailed
discussion). While a leveraged firm may be utilising its existing cash holdings to meet debt obligations, the same firm is also more
likely to raise fresh debt in order to maintain adequate levels of liquidity, thereby indicating a feedback loop (see D'Mello et al., 2008
for a discourse on endogenous relationship between cash and debt policies). Further, cash holdings and non-cash liquid assets are
likely to be determined simultaneously by a firm's management. Since cash holdings and net non-cash working capital (which
contains current assets like accounts receivables and inventory) are considered substitutes to an extent, it is difficult to ascertain
whether the decision to hold less (more) cash is motivated by the presence of more (less) net non-cash working capital or vice-versa.
In addition, cash holdings share a plausible bidirectional relationship with dividend payment and capital expenditure. For instance,
even though the decision to distribute dividends or incur capital expenditure in a particular year depends on the amount of cash
which the firm possesses, payments made for these purposes have not only a direct impact on the closing value of cash holdings for
that year but for several years in the future. Further, cash holdings and profitability may also be endogenously related since a change
in cash holdings potentially influences profitability (La Rocca and Cambrea, 2018) and profitability is expected to determine cash
12
In addition, consistent with the standard practice in dynamic panel modelling (Kripfganz, 2019), we consider lagged value of dependent
variable (i.e. lagged value of cash holdings) as predetermined in all regression models. The minimum and maximum lag length for GMM style
instruments for lagged value of cash holdings are 0 and 1 respectively for all models.
8
holdings (Al-Najjar, 2013). Lastly, the relationship between cash holdings and growth potential also exhibits potential two-way
causality. While a firm may decide to hold more (less) cash on account of better (poor) investment opportunities (as represented by
the ratio of market value of the firm to book value of the firm), a significant surplus or deficit of cash may send wrong signals to
market participants, thereby adversely affecting the stock price and (consequently) the ratio of market value of the firm to book value
of the firm.
The validity of estimates obtained from system GMM estimator depends on multiple diagnostic tests. Exogeneity of instruments is
a crucial assumption for validity of results based on system GMM regressions. We use the Sargan–Hansen J test for over-identified
restrictions in order to evaluate the validity of instruments (Sargan, 1958; Hansen, 1982). The Sargan-Hansen J test statistic follows a
chi-square distribution under the null hypothesis of instrument validity. We report p-value of the two-step Sargan–Hansen J test for
all regressions models. Another key condition for the validity of the estimates obtained from system GMM estimator relates to the
absence of second-order serial correlation in the first-differenced residuals (Arellano and Bond, 1991). In this regard, a relevant
statistical tool is Arellano-Bond test of second-order serial correlation which evaluates the null hypothesis of absence of second-order
serial correlation in the first-differenced residuals. We report p-value corresponding to Arellano-Bond test statistic for second-order
serial correlation for all models considered in this study. Further, we employ the two-step variant of the system GMM estimator in all
regressions (Windmeijer, 2005). In addition, we cluster the standard errors at firm level for all our models. For all regressions, we
ensure that the number of instruments is less than the number of groups (Roodman, 2009). In order to minimise the loss of in
formation due to missing observations on account of an unbalanced panel dataset, we use forward orthogonal deviations in order to
obtain transformed equation for all our models (Roodman, 2009). We keep the minimum and maximum lag length of GMM style
instruments as 1 and 4 respectively in all models for leverage, liquidity, dividend payment, capital expenditure and growth potential.
For profitability, we keep the minimum and maximum lag length of GMM style instruments as 1 and 6 respectively in all models.
Furthermore, we control the effect of cross-section invariant variables (such as macroeconomic factors) by including time dummies in
all our models.
5. Results
Despite a pronounced upward trend in corporate cash holdings globally, Indian non-financial firms have witnessed a gradual
decline in average level of liquid assets over the past decade. In Fig. 1, we show yearly trend of mean corporate cash holdings (defined
as the ratio of cash and cash equivalents to total assets) for our sample of 1696 Indian non-financial firms over the period 2001–2016.
As is evident in the figure, average cash holdings vary in a narrow range between 3.22% and 4.89%. From 2001 to 2007, cash
balances steadily rise to reach a peak of 4.89% in 2007. Due to the global financial crisis of 2008–09, liquid asset holdings ex
perienced a conspicuous decrease as firms utilized cash to fund operational and financial obligations amidst contraction in income
and consumption levels accompanied by a significant liquidity crunch in external capital markets.
Since 2010, cash holdings have consistently reduced each year (except 2015) to touch a low of 3.22% in 2016. On the contrary,
promoter ownership exhibits an upward trend. In fact, promoter ownership has consistently increased each year since 2007 to attain
an average level of 53.53% in 2016. Clearly, the figure shows a negative relationship between cash holdings and promoter ownership
for firms in our sample data set.
0.06 0.54
Cash and cash equivalents/Total assets
0.53
0.05
Promoter ownership (in %)
0.52
0.04 0.51
0.5
0.03
0.49
0.02 0.48
0.47
0.01
0.46
0 0.45
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Time
Cash Holdings Promoter Ownership
Fig. 1. Evolution of corporate cash holdings and promoter ownership.

This figure shows the trend of corporate cash holdings and promoter ownership for firms in our sample. Each data point for cash holdings represents
yearly average of firm-specific ratios of cash and cash equivalents to book value of total assets. Each data point for promoter ownership represents
yearly average of firm-specific values of promoter ownership.
9
Table 2
Examination of dynamic adjustment behaviour of cash holdings.
Model: (1) (2)
Firm fixed effects Pooled OLS
Variables: ∆(Cash/TA)it ∆(Cash/TA)it

∆(Cash/TA)it−1 −0.3360*** −0.3162***
(0.1212) (0.0123)
Intercept −0.0007 −0.0003
(0.0009) (0.0002)
Time period 2001–16 2001–16
Firm fixed effects Yes No
Year dummies Yes No
Firm-year observations 21,558 21,558
No. of firms 1695 1695
R-squared 0.1178 (within) 0.1012
F statistic 62.82*** 660.98***
This table shows results for regressions of change in cash holdings on lagged change in cash holdings. Cash
holdings are measured as cash and cash equivalents/Total assets i.e. Cash/TA. Firm fixed effects regression
includes time dummies (not reported due to space constraints) to control the impact of cross-section in
variant variables (such as macroeconomic factors). Parentheses contain standard errors clustered at firm-
level. * denotes significance at 0.10 level (2-tailed), ** denotes significance at 0.05 level (2-tailed) and ***
denotes significance at 0.01 level (2-tailed). t statistic has been used to perform hypothesis testing.
5.1. Dynamic adjustment behaviour of corporate cash holdings
We follow Venkiteshwaran (2011) to empirically establish dynamic adjustment behaviour of cash holdings for our sample firms.
For this purpose, we estimate a first order autoregressive model of changes in cash holdings (i.e. Cash/TA) with firm fixed effects and
time dummies. The concerned model is represented in Eq. (3).
(Cash/TA) it = + (Cash/TA) it 1 + i,t (3)
where, α is the intercept. i is firm identifier and t is time identifier. β is regression coefficient of lagged value of first-differenced cash
holdings. εi, t represents the conventional error term. We consider standard errors clustered at firm level to control for potential
heteroskedasticity in the error term.
As shown in Table 2, the estimated value of β is found to be −0.336 which is significant at 1% level of significance. Clearly, this
negative and significant coefficient indicates that cash holdings display mean-reverting properties. For robustness purposes, we
follow Guariglia and Yang (2016) and run pooled ordinary least squares (OLS) regression for Eq. (3) to investigate dynamic ad
justment behaviour of corporate cash holdings. Again, the negative and significant coefficient of lagged differenced term of cash
holdings in model 2 indicates concrete statistical evidence to validate mean-reverting properties of cash holdings. These results
support the dynamic adjustment behaviour of cash holdings for firms in our sample and corroborates the use of system GMM
estimator to examine determinants of cash holdings.
5.2. Relationship between corporate cash holdings and promoter ownership
In Table 3, we present results of dynamic panel regressions of corporate cash holdings on various categories of promoter own
ership and a range of firm-specific characteristics which serve as control variables for all models reported in this study. With regard to
the relationship of these control variables with cash holdings, our findings are consistent with existent literature. For instance, we
find a negative association between firm size and cash holdings due to the presence of economies of scale in cash management (Vogel
and Maddala, 1967). Further, small firms are expected to hold a higher proportion of liquid assets (than large firms) since they face a
relatively high possibility of financial distress due to information asymmetries and borrowing constraints. In line with pervasive
extant empirical evidence (Megginson et al., 2014; Devos and Rahman, 2018), we find a negative relationship between cash holdings
and liquidity (measured as non-cash net working capital divided by total assets) since liquid assets (other than cash and cash
equivalents) serve as substitutes of cash (Opler et al., 1999). In consonance with the arguments of financing hierarchy theory which
postulates that cash holdings are an outcome of a firm's financing and investment activities (Dittmar et al., 2003), we find that cash
flow is positively related with cash holdings since firms with more cash flow are expected to stockpile more liquid assets (ceteris
paribus). Further, we document a negative association between capital expenditure and cash holdings since capital expenditure leads
to creation of assets which can be used as collateral for borrowing purposes, thereby indicating a lower demand for cash. Our findings
also reveal a positive relationship between cash holdings and cash flow volatility as firms with more volatile cash flow hold relatively
high levels of liquid assets. Lastly, we do not find clear and concrete empirical evidence regarding relationship of cash holdings with
leverage, profitability, growth potential and dividend payment.
With regard to the association between cash holdings and promoter ownership, Table 3 contains a total of eight models corre
sponding to the first research hypothesis of this study. Indicating the autoregressive nature of cash holdings, the explanatory variable
10
Table 3
Relationship between cash holdings and equity ownership of promoter entities.
Model: (3) (4) (5) (6) (7) (8) (9) (10)
Dependent variable: Cash holdings

Variables: Cash/TA Cash/TA Cash/TA Cash/TA Cash/TA Cash/TA Cash/TA Cash/TA
Lagged cash holdings 0.4435*** 0.4331*** 0.4853*** 0.4637*** 0.4808*** 0.4510*** 0.2719*** 0.4423***
(0.0392) (0.0397) (0.1436) (0.0406) (0.1863) (0.0730) (0.0795) (0.0649)
Size −0.0024*** −0.0027*** −0.0035 −0.0039*** −0.0012 −0.0010 −0.0046* 0.0011
(0.0008) (0.0009) (0.0027) (0.0013) (0.0024) (0.0012) (0.0024) (0.0025)
Leverage −0.0018 −0.0003 0.0016 0.0042 0.0111 0.0024 0.0181 −0.0772*
(0.0171) (0.0172) (0.0698) (0.0309) (0.0532) (0.0321) (0.0464) (0.0417)
Liquidity −0.0303** −0.0361*** −0.0646 −0.0694*** 0.0395 −0.0207 −0.0582 0.0012
(0.0131) (0.0136) (0.0690) (0.0197) (0.0630) (0.0271) (0.0612) (0.0394)
Profitability 0.0198 0.0071 0.0796 −0.1103 0.0274 0.0481 0.0530 −0.1049
(0.0422) (0.0446) (0.1779) (0.0688) (0.1680) (0.0618) (0.0702) (0.1244)
Growth potential 0.0001 0.0011 −0.0102 0.0056 −0.0055 −0.0014 0.0026 0.0047
(0.0037) (0.0039) (0.0080) (0.0055) (0.0069) (0.0055) (0.0057) (0.0058)
Cash flow 0.0676*** 0.0653*** 0.0305 0.1022*** 0.0622 0.0241 0.0368 0.0255
(0.0177) (0.0181) (0.0578) (0.0276) (0.0739) (0.0380) (0.0348) (0.0543)
Dividend −0.0400 −0.0444 −0.0855 −0.0404 −0.0040 −0.0392 −0.0048 0.0237
(0.0300) (0.0298) (0.2021) (0.0296) (0.1148) (0.0481) (0.0311) (0.0300)
Capex −0.0974*** −0.0803** −0.0870 −0.1229** −0.0982 −0.1068 −0.1076 −0.0580
(0.0351) (0.0353) (0.1146) (0.0484) (0.1963) (0.0791) (0.0840) (0.0711)
CF volatility 0.1673*** 0.1735*** 0.1108 0.1496*** 0.0875 0.1651** 0.2784** −0.0545
(0.0310) (0.0323) (0.1338) (0.0395) (0.1522) (0.0780) (0.1173) (0.0769)
Promoter −0.0089*
(0.0054)
Indian promoter −0.0056
(0.0047)
Indian prom_Banks & FIs −0.1610
(0.2002)
Indian prom_Corporates −0.0119**
(0.0059)
Indian prom_Govt 0.0125
(0.0488)
Foreign promoter −0.0050
(0.0125)
Foreign prom_NRIs −0.0046
(0.0288)
Foreign prom_Corporates −0.1156***
(0.0429)
(Foreign prom_Corporates)2 0.1792***
(0.0684)
Intercept 0.0792** 0.0840*** 0.1494 0.1174*** 0.0303 0.0651 0.0701 0.0347
(0.0324) (0.0325) (0.2142) (0.0397) (0.1410) (0.0496) (0.0447) (0.0451)
Time period 2001–16 2001–16 2007–16 2007–16 2007–16 2001–16 2007–16 2007–16
Year dummies Yes Yes Yes Yes Yes Yes Yes Yes
Firm-year observations 6991 6864 586 4226 601 2004 954 677
No. of firms 671 666 366 565 368 475 318 202
No. of instruments 72 72 57 58 58 72 58 59
AB AR(1) test p-value 0 0 0.6559 0 0.2626 0 0.0065 0.0008
AB AR(2) test p-value 0.1405 0.1536 0.1904 0.8825 0.5818 0.2243 0.6812 0.8744
Sargan-Hansen p-value 0.2225 0.2023 0.2228 0.3409 0.3069 0.1008 0.5895 0.8811
This table shows results for dynamic panel regressions of corporate cash holdings on equity ownership of different categories of promoters and a
group of control variables. The dependent variable is cash and cash equivalents/Total assets i.e. Cash/TA. Parentheses contain standard errors
clustered at firm-level. The p-values of AB AR(1) and AB AR(2) tests correspond to Arellano and Bond (1991) test statistics with null hypotheses of
absence of first and second order serial correlation in first-differenced residuals respectively. The p-value of Sargan-Hansen corresponds to a test of
over-identifying restrictions (2-step moment functions and 2-step weighting matrix) with null hypothesis of instrument validity (Sargan, 1958;
Hansen, 1982). The number of firms and firm-year observations are different for each model due to unbalanced nature of the dataset. * denotes
significance at 0.10 level (2-tailed), ** denotes significance at 0.05 level (2-tailed) and *** denotes significance at 0.01 level (2-tailed). Z statistic has
been used to perform hypothesis testing. Details regarding abbreviation and measurement of variables are presented in Appendix A.1.
representing lagged cash holdings is positive and statistically significant in all models presented in Table 3, thereby indicating the
auto-regressive nature of cash holdings. In model 3, we notice a negative and significant coefficient of overall promoter ownership,
thereby indicating a negative relationship between cash holdings and promoter ownership. Further, as shown in models 4 and 5, our
results do not provide concrete evidence regarding association of cash holdings with promoter ownership of Indian promoters
11
(overall) and Indian banks and financial institutions.13 Although statistically insignificant, the negative coefficients for both these
categories of promoter ownership are consistent with the arguments of the ‘efficient monitoring hypothesis’. Providing empirical
support to hypothesis H1a, our results in model 6 show that an increase in promoter ownership of Indian corporate bodies is
associated with a decrease in cash holdings. In this regard, our findings are consistent with the results obtained by Bhat and
Bachhawat (2005) who report a negative relationship of cash holdings with corporate ownership and number of block-holders for a
sample of Indian manufacturing firms. However, as is evident in results for model 7, cash holdings do not seem to be related to
promoter ownership of Indian central and state governments.14.
Broadly, our results suggest that promoters' ownership stake and long-term investment horizon motivate them to efficiently
monitor and influence corporate cash decisions with a view to prohibit hoarding of liquid assets. These findings seem particularly
evident in case of Indian promoter corporate bodies. In consonance with the arguments of the ‘efficient monitoring hypothesis’ and
large shareholder activism, another important inference which may be construed from our findings relates to the role of promoter
ownership as a corporate governance mechanism with regard to corporate cash management. Apparently, promoters keep a check on
the management by limiting the amount of corporate resources (in the form of cash and cash equivalents) under managers' control. As
an internal governance mechanism, promoter ownership seems to resolve agency conflicts concerning corporate cash holdings. For
emerging economies like India which exhibit high levels of promoter shareholding (i.e. concentrated ownership), this is a notable
takeaway since corporate governance mechanisms are often weaker in developing countries than developed countries (Gugler et al.,
2003).
Interestingly, our results are inconsistent with the findings of Anand et al. (2012), Ranajee and Pathak (2019) and Arora (2019)
who provide empirical evidence in support of a positive association between cash holdings and promoter ownership for Indian non-
financial firms. This contradiction in findings could be explained on the basis of different methodological approaches adopted in these
papers as compared to our study. For instance, while our findings are based on dynamic panel regressions, Anand et al. (2012), Arora
(2019) and Ranajee and Pathak (2019) employ cross-sectional regression, pooled OLS estimator and fixed-effects estimator re
spectively to obtain their results. All these methodologies do not capture the dynamic adjustment behaviour of cash holdings since
lagged value of dependent variable is not included as an explanatory variable in the model. In fact, cross-sectional regression and
pooled OLS estimator fail to distinctly capture the heterogeneity across cross-sectional units and time simultaneously. Moreover,
these estimation techniques are not capable of addressing potential consequences of endogeneity (due to simultaneity) in the form of
biased and inconsistent estimates. Lastly, the incongruity of our findings with results of these studies may also be a result of dif
ferences in sample size, time period and model specification.15
In relation to foreign promoters, we do not find sufficient statistical evidence to suggest that cash holdings are associated with
promoter ownership held by foreign entities (overall) and non-resident Indians (please see models 8 and 9). However, our results
suggest that promoter ownership of foreign corporate bodies shares a U-shaped relationship with cash holdings (please see model
10).16 In particular, for a unit increase in promoter ownership of foreign corporate bodies, cash holdings initially decrease (till
promoter ownership of foreign corporate bodies reaches 32.25%, ceteris paribus) and subsequently increase (for levels of promoter
ownership of foreign corporate bodies higher than 32.25%, ceteris paribus). Hence, we note an asymmetric relationship between cash
holdings and promoter ownership of foreign corporate bodies which essentially depends on the level of promoter ownership of
foreign corporate bodies. This result is in contrast to our general findings of a negative relationship between cash holdings and
promoter ownership. In fact, cash holdings seem to increase with rise in promoter ownership of foreign corporate bodies once the
latter crosses the threshold of 32.25%. Although this may be a result of ‘tunneling’, we suggest additional reasons to explain this
finding. First, foreign promoter corporations may allow firms to hold high levels of liquid assets to avoid financial distress and
curtailment in investments due to shortage of funds. In fact, foreign investors may also allow firms to hold more cash as a response to
financial frictions (especially in case of an emerging market like India) which may force firms to resort to costly external finance.
Second, foreign promoters may not have a strong inclination to push managers to distribute excess cash in the form of dividend or
buyback since repatriation of such foreign earnings may entail tax leakages (Foley et al., 2007). In this regard, several studies in the
extant literature also provide evidence of a positive relationship between cash holdings and foreign ownership. For instance, Vo
(2017) documents a positive association between foreign ownership and cash holdings for a sample of non-financial firms listed in
13
The results of model 5 do not conform to the assumption of first-order serial correlation in the first-differenced error term since the AR(1) test
statistic is not statistically significant. Thus, these findings may not be considered valid.
14
The results for model 7 do not conform to the assumption of first-order serial correlation in the first-differenced error term since the AR(1) test
statistic is not statistically significant. Thus, these findings may not be considered valid.
15
In this regard, we further examine robustness of findings of model 3 which serves as a base model concerning relationship between cash
holdings and promoter ownership by estimating the same using four additional estimation techniques namely pooled OLS regression, Fama-MacBeth
procedure, fixed-effects estimator (based on firm and industry effects separately) and between effects estimator. We obtain a negative and significant
relationship between cash holdings and promoter ownership across regressions based on all these methodological approaches. Moreover, we also
use an additional proxy of cash holdings, cash and cash equivalents/(total assets-cash and cash equivalents) i.e. Cash/NA for robustness purpose and
find similar results. These results have been presented in Appendix A.3.
16
In line with the findings of Opler et al. (1999) and Ozkan and Ozkan (2004) who elucidate a non-linear relationship between cash holdings and
managerial ownership, we empirically test possibilities of a quadratic relationship of cash holdings with all categories of promoter ownership
considered in this study. In particular, we examine the quadratic functional form for all categories of promoter ownership to test if there's a change
in promoters' orientation towards corporate cash levels beyond a threshold of ownership in the firm. However, we find statistical evidence to
support a quadratic relationship only between cash holdings and promoter ownership of foreign corporate bodies.
12
Table 4
Relationship between cash holdings and equity ownership of non-promoter entities.
Model: (11) (12) (13) (14) (15) (16)

Variables: Cash/TA Cash/TA Cash/TA Cash/TA Cash/TA Cash/TA
Lagged cash holdings 0.4435*** 0.4729*** 0.4717*** 0.4424*** 0.4536*** 0.4532***
(0.0393) (0.0358) (0.0428) (0.0388) (0.0487) (0.0412)
Size −0.0024*** −0.0039*** −0.0043*** −0.0024*** −0.0034** −0.0035***
(0.0008) (0.0011) (0.0013) (0.0008) (0.0016) (0.0011)
Leverage −0.0017 0.0121 0.0210 −0.0008 0.0121 0.0191
(0.0170) (0.0156) (0.0219) (0.0174) (0.0205) (0.0300)
Liquidity −0.0300** −0.0318** −0.0423** −0.0344*** −0.0499*** −0.0523***
(0.0131) (0.0130) (0.0171) (0.0128) (0.0192) (0.0192)
Profitability 0.0199 0.0191 −0.0034 −0.0002 0.0205 −0.0192
(0.0421) (0.0388) (0.0485) (0.0421) (0.0546) (0.0707)
Growth potential 0.0001 −0.0009 −0.0020 0.0002 0.0015 0.0036
(0.0037) (0.0038) (0.0058) (0.0037) (0.0052) (0.0048)
Cash flow 0.0676*** 0.0630*** 0.0585** 0.0726*** 0.0362 0.0868***
(0.0177) (0.0188) (0.0277) (0.0178) (0.0269) (0.0263)
Dividend −0.0400 −0.0312 −0.0400 −0.0450 −0.0154 −0.0305
(0.0300) (0.0299) (0.0397) (0.0296) (0.0390) (0.0278)
Capex −0.0971*** −0.0995*** −0.0680 −0.0985*** −0.0824** −0.1342***
(0.0352) (0.0354) (0.0414) (0.0357) (0.0404) (0.0440)
CF volatility 0.1679*** 0.1451*** 0.1525*** 0.1626*** 0.1362*** 0.1612***
(0.0311) (0.0308) (0.0427) (0.0313) (0.0412) (0.0379)
Non-promoter 0.0093*
(0.0053)
Non-prom_Institutions 0.0275**
(0.0122)
Non-prom_MFs 0.0844**
(0.0402)
Non-prom_Corporates −0.0149*
(0.0087)
Non-prom_FIIs 0.0258
(0.0271)
Non-prom_Small investors 0.0141
(0.0162)
Intercept 0.0699** 0.0710** 0.0821* 0.0825*** 0.0584 0.0843**
(0.0330) (0.0319) (0.0426) (0.0319) (0.0410) (0.0398)
Time period 2001–16 2001–16 2001–16 2001–16 2001–16 2007–16
Year dummies Yes Yes Yes Yes Yes Yes
Firm-year observations 6994 6349 5050 6978 4388 5142
No. of firms 672 664 604 672 589 658
No. of instruments 72 72 72 72 72 58
AB AR(1) test p-value 0 0 0 0 0 0
AB AR(2) test p-value 0.1399 0.8478 0.4389 0.1688 0.9996 0.5362
Sargan-Hansen p-value 0.2205 0.2312 0.1063 0.2483 0.0877 0.2610
This table shows results for dynamic panel regressions of corporate cash holdings on equity ownership of different categories of non-promoters and a
group of control variables. The dependent variable is cash and cash equivalents/total assets i.e. Cash/TA. * denotes significance at 0.10 level (2-
tailed), ** denotes significance at 0.05 level (2-tailed) and *** denotes significance at 0.01 level (2-tailed). Z statistic has been used to perform
hypothesis testing. Details regarding abbreviation and measurement of variables are presented in Appendix A.1. All other estimation specifics and
details remain the same as provided in Table 3.
Vietnam. Additionally, Luo and Hachiya (2005) and Bokpin et al. (2011) also report that cash holdings are positively associated with
foreign ownership.
5.3. Relationship between corporate cash holdings and non-promoter ownership
For an empirical examination of hypothesis H2a, we report results concerning the relationship between corporate cash holdings
and non-promoter ownership in Table 4. Analogous to Table 3, the independent variable signifying lagged cash holdings is positive
and significant in all models constituting Table 4 as well. Further, the relationship of cash holdings with control variables is also
concordant with the results reported in Table 3. In model 11, we document a positive and significant coefficient for non-promoter
ownership. Providing evidence in favour of hypothesis H2a, this result serves as an additional check for the negative association
between cash holdings and promoter ownership since promoter ownership and non-promoter ownership add up to 100% and an
increase in any one of these variables leads to a decrease in the other by construction. In discordance with hypothesis H2b, findings
corresponding to model 12 suggest that cash holdings are positively associated with institutional non-promoter ownership. This result
is in contrast to the ‘efficient monitoring hypothesis’, specifically with regard to the monitoring role of institutional investors. In fact,
13
model 13 also exhibits a positive association between cash holdings and non-promoter ownership held by mutual funds. Taken
together, these results are particularly interesting because they highlight that institutional ownership by itself may not ensure ef
ficient monitoring if such ownership corresponds to the non-promoter category.
To the extent that non-promoters may be considered as short-term investors, these findings are consistent with results docu
mented by Brown et al. (2011) who find that cash holdings increase with short-term institutional ownership. In this way, our findings
add a fresh perspective to existing literature concerning the role of institutional investors in corporate governance by highlighting the
effect of promoter/non-promoter classification of institutional investors. Further, indicating evidence in support of hypothesis H2b,
we note that non-promoter ownership corresponding to corporate bodies is negatively associated with cash holdings. In conjunction
with our findings reported in model 6 (in Table 3), this result shows that ownership by corporate bodies is negatively related to cash
holdings regardless of promoter/non-promoter classification. Moreover, these findings indicate potential evidence of tunneling of
liquid assets among business group firms which exhibit common controlling ownership. Further, as is evident in results for model
1517 and 16, we do not find sufficient statistical evidence to support linkages of cash holdings with non-promoter ownership of
foreign institutional investors and non-promoter ownership of small investors respectively.
In summary, our results suggest that although non-promoter ownership is positively associated with cash holdings in general, the
direction of this relationship may vary across different types of non-promoters. Specifically, cash holdings share a negative asso
ciation with non-promoter ownership of corporate bodies.
5.4. Effect of business group affiliation
In relation to the effect of business group affiliation on the relationship between cash holdings and promoter ownership, we report
our findings in Table 5. In models 17, 18 and 19, the dummy variable ‘Non-affiliated’ takes a value of 1 when the firm is not affiliated
to a business group and 0 when the firm is affiliated to a business group. In model 17, we find that although the coefficient for
promoter ownership remains negative and statistically significant, the explanatory variable signifying interaction between promoter
ownership and dummy variable for non-affiliated firms is not significant. Similarly, in model 18, the coefficient for ownership of
Indian promoter corporate bodies remains negative and significant but the interaction between ownership of Indian promoter cor
porate bodies and dummy variable for non-affiliated firms is not significant. However, in model 19, the variable representing the
interaction between ownership of foreign promoter corporate bodies and dummy variable for non-affiliated firms is positive and
statistically significant, thereby indicating that the negative relationship between cash holdings and promoter ownership is relatively
more pronounced for group-affiliated firms than non-affiliated firms. In particular, the coefficient for promoter ownership of foreign
corporate bodies takes a value of −0.1239 for group-affiliated firms and − 0.0886 (−0.1239 + 0.0353) for non-affiliated firms.
Although the sign of the variable signifying interaction between different categories of promoter ownership and dummy variable
for non-affiliated firms shows a positive sign in all three models of Table 5, the effect of business group affiliation on the relationship
between cash holdings and promoter ownership is statistically significant only in model 19. Overall, these results provide weak
empirical support to hypothesis H3, thereby indicating that compared to non-affiliated firms, group-affiliated firms might exhibit a
significantly stronger negative relationship of cash holdings with promoter ownership. Since business group firms are considered less
financially constrained due to their access to internal capital markets (Schiantarelli and Sembenelli, 2000), promoters might possibly
exercise their influence and control over managers to bring down cash holdings to even lower levels as compared to non-affiliated
firms (ceteris paribus). More importantly, our findings extend the empirical literature on cash holdings and business group affiliation
(Cai et al., 2016; Lin et al., 2019) by providing evidence that promoter ownership might act as a potential channel which induces
lower cash holdings for business group firms compared to non-affiliated firms.
6. Robustness checks
In contrast to static models, dynamic panel regressions provide an opportunity to ascertain the long-term impact of an in
dependent variable on the dependent variable. The presence of the lagged dependent variable in the model means that the coeffi
cients of independent variables are interpreted as short-term effects (Baltagi et al., 2009). The impact of shocks in an independent
variable may have considerable influence on dependent variable across several time periods in the future (see Appendix B for a
detailed discussion). Long-term coefficients and short-term coefficients may differ in terms of magnitude and statistical significance.
In particular, partial slope coefficient of an independent variable may be significant in the short-term but not in the long-term. The
calculation of long-term coefficients allows us to ascertain whether cash holdings share a statistically significant relationship with
equity ownership of various categories of promoters/non-promoters over the long-term (in addition to short-term). In this way,
estimation of long-term coefficients serves as a robustness check for short-term coefficients obtained from dynamic panel regressions
as part of our main results. Specifically, the long-term coefficient for an independent variable is calculated as β/(1-δ), where β is the
short-term coefficient of the concerned independent variable and δ is the coefficient of lagged cash holdings. In Table 6, we report
long-term coefficients of all our variables of interest which correspond to research hypotheses examined in this study. In addition, we
reproduce short-term coefficients of our variables of interest in Table 6 for the purpose of comparison. Clearly, the direction of
relationship of all variables of interest with cash holdings is consistent across short-term and long-term estimations. Moreover, results
17
The results for model 15 do not conform to the assumption of instrument validity since the Sargan-Hansen test statistic is statistically significant
at 10% level of significance. Thus, these findings may not be considered valid.
14
Table 5
Differential effect of business group affiliation on relationship between corporate cash holdings and promoter ownership.
Model: (17) (18) (19)

Variables: Cash/TA Cash/TA Cash/TA
Lagged cash holdings 0.4436*** 0.4642*** 0.4448***
(0.0392) (0.0407) (0.0675)
Size −0.0020** −0.0036*** 0.0013
(0.0009) (0.0014) (0.0026)
Leverage −0.0038 0.0040 −0.0752*
(0.0174) (0.0309) (0.0422)
Liquidity −0.0312** −0.0693*** −0.0009
(0.0132) (0.0197) (0.0402)
Profitability 0.0178 −0.1094 −0.1073
(0.0424) (0.0686) (0.1282)
Growth potential 0.0002 0.0056 0.0046
(0.0037) (0.0055) (0.0059)
Cash flow 0.0675*** 0.1020*** 0.0301
(0.0177) (0.0275) (0.0553)
Dividend −0.0423 −0.0405 0.0230
(0.0302) (0.0296) (0.0317)
Capex −0.0979*** −0.1229** −0.0631
(0.0352) (0.0483) (0.0742)
CF volatility 0.1657*** 0.1487*** −0.0584
(0.0314) (0.0396) (0.0797)
Promoter −0.0103*
(0.0054)
Promoter*Non-affiliated 0.0046
(0.0031)
(0.0061)
Indian prom_Corporates*Non-affiliated 0.0077
(0.0067)
(0.0385)
2
(Foreign prom_Corporates) 0.1847***
(0.0643)
Foreign prom_Corporates*Non-affiliated 0.0353*
(0.0196)
Intercept 0.0795** 0.1150*** 0.0333
(0.0323) (0.0395) (0.0497)
Time period 2001–16 2007–16 2007–16
Year dummies Yes Yes Yes
Firm-year observations 6991 4226 677
No. of firms 671 565 202
No. of instruments 73 59 60
AB AR(1) test p-value 0 0 0.0008
AB AR(2) test p-value 0.1387 0.8851 0.8883
Sargan-Hansen p-value 0.2284 0.3402 0.8635
This table shows results for dynamic panel regressions of corporate cash holdings on interaction terms concerning business group affiliation status of
a firm and different proxies of promoter ownership along with a group of control variables. The dummy variable ‘Non-affiliated’ takes a value of 1
when the firm is not affiliated to a business group and 0 when the firm is affiliated to a business group. The sample includes 681 firms which belong
to business groups and 1015 non-affiliated firms. The dependent variable is cash and cash equivalents/Total assets i.e. Cash/TA. * denotes sig
nificance at 0.10 level (2-tailed), ** denotes significance at 0.05 level (2-tailed) and *** denotes significance at 0.01 level (2-tailed). Z statistic has
been used to perform hypothesis testing. Details regarding abbreviation and measurement of variables are presented in Appendix A.1. All other
estimation specifics and details remain the same as provided in Table 3.
pertaining to statistical significance of short-term and long-term coefficients are absolutely congruous, thereby indicating that a
variable which is significant (insignificant) in the short run, is also significant (insignificant) in the long run. This analysis provides
additional empirical support to our principal findings. Hence, we may conclude that the relationship between cash holdings and
promoters/non-promoter ownership is not just a short-term phenomenon but has long-term implications.
In addition to examination of long-term coefficients of all variables of interest in this study, we verify the robustness of our results
by using t statistic instead of Z statistic for the purpose of hypothesis testing keeping in view the reduced sample size for some models
on account of unbalanced nature of our panel dataset. Our findings with respect to sign and statistical significance of all variables of
interest remain consistent with our main results and the same are reported in Appendix C.
15
Table 6
Long-term coefficients for robustness.
Reference model Variable Short-term coefficient Long-term coefficient
Model 3, Table 3 Promoter −0.0089* (0.0054) −0.0160* (0.0095)

Model 4, Table 3 Indian promoter −0.0056 (0.0047) −0.0098 (0.0082)
Model 5, Table 3 Indian prom_Banks & FIs −0.1610 (0.2002) −0.3129 (0.3900)
Model 6, Table 3 Indian prom_Corporates −0.0119** (0.0059) −0.0222** (0.0110)
Model 7, Table 3 Indian prom_Govt 0.0125 (0.0488) 0.0242 (0.0955)
Model 8, Table 3 Foreign promoter −0.0050 (0.0125) −0.0090 (0.0228)
Model 9, Table 3 Foreign prom_NRIs −0.0046 (0.0288) −0.0063 (0.0396)
Model 10, Table 3 Foreign prom_Corporates −0.1156*** (0.0429) −0.2072*** (0.0746)
Model 10, Table 3 (Foreign prom_Corporates)2 0.1792*** (0.0684) 0.3213*** (0.1165)
Model 11, Table 4 Non-promoter 0.0093* (0.0053) 0.0167* (0.0095)
Model 12, Table 4 Non-promoter_Institutions 0.0275** (0.0122) 0.0523** (0.0238)
Model 13, Table 4 Non-prom_MFs 0.0844** (0.0402) 0.1598** (0.0793)
Model 14, Table 4 Non-prom_Corporates −0.0149* (0.0087) −0.0268* (0.0156)
Model 15, Table 4 Non-prom_FIIs 0.0258 (0.0271) 0.0471 (0.0498)
Model 16, Table 4 Non-prom_Small investors 0.0141 (0.0162) 0.0258 (0.3760)
Model 17, Table 5 Promoter −0.0103* (0.0054) −0.0186* (0.0095)
Model 17, Table 5 Promoter*Non-affiliated 0.0046 (0.0031) 0.0083 (0.0056)
Model 18, Table 5 Indian prom_Corporates −0.0138** (0.0061) −0.0258** (0.0114)
Model 18, Table 5 Indian prom_Corporates*Non-affiliated 0.0077 (0.0067) 0.0143 (0.0126)
Model 19, Table 5 Foreign prom_Corporates −0.1239*** (0.0385) −0.2232*** (0.0689)
Model 19, Table 5 (Foreign prom_Corporates)2 0.1847*** (0.0643) 0.3326*** (0.1129)
Model 19, Table 5 Foreign prom_Corporates*Non-affiliated 0.0353* (0.0196) 0.0636* (0.0376)
This table shows long-term coefficients and standard errors for variables of interest across models reported in Tables 3, 4 and 5. For comparison
purposes, short-term coefficients (as reported earlier in Tables 3, 4 and 5) are reproduced here. The long-term coefficient for an independent
variable is calculated as β/(1 − δ),where β is the short-term coefficient of the concerned independent variable and δ is the coefficient of lagged cash
holdings in the original model. Parentheses contain standard errors. * denotes significance at 0.10 level (2-tailed), ** denotes significance at 0.05
level (2-tailed) and *** denotes significance at 0.01 level (2-tailed). Z statistic has been used to perform hypothesis testing. Details regarding
abbreviation and measurement of variables are presented in Appendix A.1.
7. Conclusion
A firm is faced with a continuous and intricate challenge of maintaining an optimal level of cash holdings in order to maximise
shareholders' wealth. However, corporate cash management represents a plausible scenario for both types of agency conflicts: type I
and type II. In type I agency problem, while shareholders may prefer distribution or investment of excess cash, managers may choose
to accumulate cash in order to pursue their own objectives and avoid market discipline. In type II agency problem, controlling
shareholders may indulge in cash hoarding in order to extract private benefits at the expense of minority shareholders. Against this
backdrop, we examine the relationship between corporate cash holdings and equity ownership of different types of promoters and
non-promoters for a sample of Indian non-financial firms for the period 2001–2016. Contradictory to earlier studies (Ranajee and
Pathak, 2019; Arora, 2019), our findings show that an increase in the level of ownership of promoters (overall) and Indian promoter
corporate bodies is associated with a decrease in cash holdings, thereby providing empirical support to the ‘efficient monitoring
hypothesis’. Highlighting the active role played by corporates in cash management practices, our results suggest that ownership of
non-promoter corporate bodies is also associated with a reduction in cash holdings. Furthermore, our findings indicate that aggregate
non-promoter ownership, institutional non-promoter ownership and non-promoter ownership of mutual funds are positively asso
ciated with cash holdings. In addition, we document a U-shaped relationship between cash holdings and ownership of foreign
promoter corporate bodies. We also document that an increase in ownership of foreign promoter corporate bodies is associated with a
greater reduction in cash holdings for group-affiliated firms compared to non-affiliated firms. These findings provide weak empirical
evidence to suggest that promoter ownership might act as channel inducing lower demand of liquid assets by business group firms (as
compared to non-affiliated firms) on account of internal capital markets. In this regard, our results are similar to the findings of Wang
and Wang (2018) who report that internal capital market operations are negatively associated with corporate cash holdings.
Overall, our study highlights that promoter ownership may preclude hoarding of liquid assets on corporate balance sheets in an
emerging market set-up. However, these results should be viewed in light of limitations and practical confines of the study. First, we
do not consider the joint interplay of effects of different ownership categories on cash holdings since we consider each ownership
category in a separate regression. To this extent, the validity of our findings relies on the strong assumption of independence among
the effects of different ownership categories on cash holdings. Second, our findings critically depend on econometric choices such as
categorisation of independent variables as predetermined/endogenous/exogenous, number of lags of independent variables used as
instruments etc. Any modifications in these econometric assumptions may change our results. Third, our theoretical inferences in
support of the ‘efficient monitoring hypothesis’ may warrant additional analysis since the negative association between cash holdings
and promoter ownership can also be an outcome of squandering of liquid assets by promoters and managers collectively.
16
From the standpoint of practical relevance, our results provide an indication of potential implications of a tentative plan of the
Indian central government to increase minimum public shareholding limit from 25% to 35% for listed companies in India.18 Although
average cash levels in the Indian corporate sector have witnessed a downtrend in recent years, the practical enforcement of this
change may increase likelihood of cash accretion due to decline in promoter ownership in many firms.19 This may affect the ag
gregate demand for money in the economy which may provide relevant and important information to policy makers and regulators.
Moreover, on account of this potential decrease in promoter ownership, the incentive and motivation of promoters to monitor
corporate cash decisions may also reduce, thereby providing an opportunity to self-interested managers to squander liquid assets.
Finally, in light of our findings, more work needs to be done in order to determine potential ways in which excess cash is utilized by
firms with high promoter ownership. Further, future research may also examine whether corporate governance characteristics
moderate the relationship between corporate cash holdings and promoter ownership.
Acknowledgements
We would like to thank the editor and two anonymous referees for their constructive comments and suggestions which have
contributed towards significant improvement of this paper. We are grateful to Anant Gupta for his excellent research assistance. We
are indebted to Prof. Sebastian Kripfganz for his exceptional guidance and support in implementation of dynamic panel estimation.
We also thank Dr. Narander Kumar Nigam, Neeraj Jain, Dr. Vaibhav Lalwani, Harendra Nath Tiwari and Saumya Jain for their
valuable inputs.
Appendix A. Appendices
A.1. List of variables with their respective definition and abbreviation
Variable Description Abbreviation Period
Cash holdings (Cash and cash equivalents)/Total assets or (Cash and cash equivalents)/(Total assets- Cash/TA or Cash/ 2001–16
Cash and cash equivalents) NA
Size Natural logarithm of Total assets Size 2001–16
Leverage Total borrowings/Total assets Leverage 2001–16
Liquidity (Current assets-current liabilities-cash and cash equivalents)/Total assets Liquidity 2001–16
Profitability Return on total assets Profitability 2001–16
Growth potential (Market value of firm)/Book value of firm Growth potential 2001–16
Cash flow (Net operating cash flow)/Total assets Cash flow 2001–16
Dividend payment Dummy variable (1 if dividend paid in a year and 0 otherwise) Dividend 2001–16
Capital expenditure (Cash outflow due to purchase of fixed assets)/Total assets Capex 2001–16
Cash flow volatility Standard deviation of (Net cash flow/Total assets) over past 5 years CF volatility 2001–16
Business group affiliation Dummy variable (1 if the firm is not affiliated to a business group and 0 if the firm Non-affiliated 2001–16
belongs to a business group)
Promoter Equity ownership of promoters (in %) Promoter 2001–16
Indian promoter Equity ownership of Indian promoters (in %) Indian promoter 2001–16
Indian promoter - Banks and financial Equity ownership of Indian banks and financial institutions as promoters (in %) Indian prom_Banks 2007–16
institutions & FIs
Indian promoter - Corporate bodies Equity ownership of Indian corporate bodies as promoters (in %) Indian 2007–16
prom_Corporates
Indian promoter - Central/State gov Equity ownership of Indian central/state government as promoters (in %) Indian prom_Govt. 2007–16
ernment
Foreign promoter Equity ownership of foreign promoters (in %) Foreign promoter 2001–16
Foreign promoter - Non-resident India Equity ownership of non-resident Indians (NRIs) as promoters (in %) Foreign prom_NRIs 2007–16
ns (NRIs)
Foreign promoter - Corporate bodies Equity ownership of foreign corporate bodies as promoters (in %) Foreign 2007–16
prom_Corporates
Non-promoter Equity ownership of non-promoters (in %) Non-promoter 2001–16
Non-promoter - Institutions Equity ownership of institutions as non-promoters (in %) Non- 2001–16
prom_Institutions
Non-promoter - Mutual funds (MFs) Equity ownership of mutual funds (MFs) as non-promoters (in %) Non-prom_MFs 2001–16
Non-promoter - Corporate bodies Equity ownership of corporate bodies as non-promoters (in %) Non- 2001–16
prom_Corporates
Non-promoter - Foreign institutional i Equity ownership of foreign institutional investors as non-promoters (in %) Non-prom_FIIs 2001–16
nvestors (FIIs)
Non-promoter - Small investors Equity ownership of non-promoter investors with nominal investment up to USD Non-prom_Small in 2007–16
1538.46 (in %) vestors
18
See https://www.indiabudget.gov.in/budget2019-20/doc/Budget_Speech.pdf for further information.
19
See https://www.business-standard.com/budget/article/budget-2019-minimum-public-float-in-listed-companies-now-at-35-119070600016_1.
html for details.
17
This table provides the list of variables along with details on their measurement and time period considered in the study.
Abbreviation shows the legends used in the paper to indicate variables. Return on total assets has been calculated as ‘Earnings before
interest and taxes divided by total assets’. Further, market value of firm has been calculated as (Total outstanding stock*stock price as
on June 30 of the succeeding financial year + book value of total borrowing). Although values of all variables have been considered
at the end of financial year (i.e. March 31), we use stock prices as on June 30 (of the succeeding financial year) instead of March 31 in
order to adjust for the time taken by companies to release financial statements in the public domain. Book value of the firm is
represented by book value of total assets. Due to unavailability of data, the time period considered for some ownership categories is
2007–2016 instead of the full period 2001–2016. In case of ‘Non-promoter – Small investors’, we assume INR 1,00,000 = USD
1538.46 at an exchange rate of USD 1 = INR 65.
A.2. Relevance of dynamic modelling for corporate cash holdings
In the context of corporate cash management, the trade-off theory postulates that firms weigh costs and benefits of holding cash in
order to achieve a level of cash holdings which maximises shareholder wealth (see Opler et al., 1999 for a detailed discussion). In this
regard, the theory suggests that firms have incentives to actively curtail deviations from their target cash levels (Guariglia and Yang,
2016). Based on the time taken by firms to move from suboptimal cash levels towards their target level of cash holdings, trade-off
theory can be divided into two functional models – static trade-off model and dynamic trade-off model. According to the static trade-
off model, cash holdings are determined by a single period trade-off between costs and benefits of holdings liquid assets (Guariglia
and Yang, 2016). However, a major limitation of the static trade-off model is the assumption of an immediate adjustment made by
firms towards target cash levels in a single time period. Practically, adjustment costs20 may prevent firms from swiftly achieving their
target cash levels since managers need to trade-off the adjustment costs against the costs of operating with suboptimal cash levels.
Hence, empirical application of static trade-off model is impeded by the presence of adjustment frictions. Contrarily, dynamic trade-
off models allow for a sluggish adjustment process of cash holdings towards the target level (Orlova and Rao, 2018; Guariglia and
Yang, 2016). In this way, dynamic trade-off models are better suited for modelling empirical behaviour of corporate cash holdings.
Dynamic adjustments towards target cash holdings have been examined by several empirical papers (Venkiteshwaran, 2011; Jiang
and Lie, 2016; Rao and Thaker, 2018; Orlova and Rao, 2018; Martínez-Sola et al., 2018). In fact, many studies consider the dynamic
nature of cash holdings and employ relevant dynamic panel estimators to identify determinants of cash holdings (Ozkan and Ozkan,
2004; Han and Qiu, 2007; Chen and Chuang, 2009; Kuan et al., 2011; Álvarez et al., 2012; Guariglia and Yang, 2016; Vo, 2017; Baldi
and Bodmer, 2018; Loncan, 2018; Jebran et al., 2019).
In comparison to the widely used fixed-effects estimator (also known as within-group estimator), system GMM estimator offers
two principal advantages. First, system GMM estimator accounts for the dynamic nature of adjustments in cash holdings and allows
for inclusion of lagged value of cash holdings as an independent variable in the model. The fixed-effects estimator produces biased
and inconsistent estimates in the presence of lagged value of dependent variable as a regressor in the model (Nickell, 1981). Second,
system GMM estimator controls for potential simultaneity21 (i.e. bidirectional relationship) between cash holdings and its de
terminants by making use of instrumental variables. The fixed-effects estimator is not suitable for estimation of models with en
dogenous regressors since it produces biased estimates in the presence of simultaneity.22 To this extent, the use of system GMM
estimator distinguishes our methodological approach from other empirical studies which use fixed-effects estimator to examine
determinants of corporate cash holdings (Ferreira and Vilela, 2004; Foley et al., 2007; Harford et al., 2008; Ramirez, 2010; Huang-
Meier et al., 2015; Maheshwari and Rao, 2017; Chauhan et al., 2018; Tong and Huang, 2018; Devos and Rahman, 2018; Ranajee and
Pathak, 2019)
20
For firms facing a deficit of cash, adjustment costs may arise in the form of higher costs of capital and floatation charges faced by firms in order
to raise additional cash required to reach target levels. Alternatively, for firms with excess cash, adjustment costs may also manifest in the form of
tax leakages associated with cash distribution to shareholders and investment of excess cash in subprime projects.
21
Abdallah et al. (2015) note that simultaneity leads to endogeneity in two ways - first, when contemporaneous realizations of both the dependent
variable and the explanatory variable(s) affect each other and second, when past realizations of the dependent variable influence current reali
zations of one or more of the explanatory variables.
22
For a detailed discussion on issues related to endogeneity, please refer to Wintoki et al. (2012), Antonakis et al. (2010), Abdallah et al. (2015)
and Gippel et al. (2015).
18
A.3. Robustness check for relationship between cash holdings and promoter ownership across different estimation procedures
C.P. Gupta and P. Bedi
Estimation methodology Pooled OLS Fama-MacBeth Firm Fixed Effects Industry Fixed Effects Between Effects

Variables Cash/TA Cash/NA Cash/TA Cash/NA Cash/TA Cash/NA Cash/TA Cash/NA Cash/TA Cash/NA
Size −0.0035*** −0.0045*** −0.0029*** −0.0037*** 0.0012 0.0013 −0.0041*** −0.0053*** −0.0032*** −0.0042***
(0.0009) (0.0012) (0.0008) (0.0011) (0.0025) (0.0032) (0.0010) (0.0013) (0.0010) (0.0014)
Leverage −0.0354*** −0.0435*** −0.0350*** −0.0424*** −0.0241*** −0.0290** −0.0300*** −0.0370*** −0.0361*** −0.0453***
(0.0063) (0.0083) (0.0054) (0.0072) (0.0091) (0.0121) (0.0064) (0.0084) (0.0107) (0.0146)
Liquidity −0.0298*** −0.0417*** −0.0484*** −0.0650*** −0.0705*** −0.0944*** −0.0528*** −0.0702*** −0.0329** −0.0441**
(0.0073) (0.0100) (0.0059) (0.0075) (0.0098) (0.0136) (0.0089) (0.0125) (0.0128) (0.0176)
Profitability 0.1106*** 0.1374*** 0.1013*** 0.1278*** 0.0962*** 0.1219*** 0.1088*** 0.1358*** 0.1246*** 0.1415**
(0.0163) (0.0216) (0.0134) (0.0174) (0.0149) (0.0202) (0.0160) (0.0214) (0.0413) (0.0565)
Growth potential −0.0013 −0.0010 0.0005 0.0014 0.0035** 0.0050** −0.0004 0.0000 −0.0068** −0.0084*
(0.0016) (0.0022) (0.0021) (0.0027) (0.0017) (0.0024) (0.0016) (0.0022) (0.0032) (0.0044)
Cash flow 0.0201** 0.0281** 0.0182* 0.0260** 0.0335*** 0.0445*** 0.0253** 0.0350** −0.0331 −0.0320
(0.0102) (0.0139) (0.0088) (0.0113) (0.0099) (0.0138) (0.0102) (0.0139) (0.0360) (0.0492)
Dividend 0.0056 0.0066 0.0283** 0.0396*** 0.0086* 0.0112 0.0037 0.0049 −0.0115 −0.0153
(0.0050) (0.0067) (0.0107) (0.0132) (0.0050) (0.0072) (0.0049) (0.0067) (0.0178) (0.0243)
Capex −0.0382*** −0.0548*** −0.0661*** −0.0906*** −0.0305*** −0.0444*** −0.0623*** −0.0839*** −0.0973** −0.1351**
(0.0134) (0.0174) (0.0123) (0.0151) (0.0117) (0.0152) (0.0131) (0.0172) (0.0436) (0.0596)
CF volatility 0.4394*** 0.5589*** 0.4367*** 0.5564*** 0.0571 0.0700 0.3857*** 0.4917*** 0.7892*** 1.0367***
19
(0.0401) (0.0529) (0.0313) (0.0405) (0.0366) (0.0490) (0.0397) (0.0523) (0.0494) (0.0675)
Promoter −0.0306*** −0.0372*** −0.0239*** −0.0289*** −0.0266** −0.0335** −0.0230*** −0.0289*** −0.0225** −0.0264*
(0.0084) (0.0109) (0.0027) (0.0042) (0.0110) (0.0145) (0.0085) (0.0110) (0.0107) (0.0146)
Lagged cash holdings – – – – – – – – – –
– – – – – – – – – –
Intercept 0.0697*** 0.0831*** 0.0448*** 0.0469*** 0.0413** 0.0480* 0.0587*** 0.0689*** 0.0816*** 0.0999***
(0.0112) (0.0149) (0.0112) (0.0142) (0.0196) (0.0256) (0.0099) (0.0129) (0.0195) (0.0267)
Time Period 2001–16 2001–16 2001–16 2001–16 2001–16 2001–16 2001–16 2001–16 2001–16 2001–16
Firm-year observations 7350 7352 7350 7352 7350 7352 7350 7352 7350 7352
No. of firms 672 672 – – 672 672 672 672 672 672
R Squared 0.168 0.156 0.208 0.196 0.093 0.084 0.223 0.205 0.399 0.376
F-statistic 23.97*** 20.77*** 147.23*** 109.66*** 9.04*** 7.70*** – – 43.80*** 39.78***
Hausman test statistic – – – – 329.44*** – – – – –
Year dummies – – – – Yes Yes Yes Yes – –
This table shows results for dynamic panel regressions of corporate cash holdings on promoter ownership and a group of control variables. For robustness purposes, we use two
proxies for the dependent variable: cash and cash equivalents/total assets i.e. Cash/TA and cash and cash equivalents/(Total assets-cash and cash equivalents) i.e. Cash/NA. Time
dummies have been included (not reported due to space constraints) to control the impact of cross-section invariant variables (such as macroeconomic factors) in fixed-effects and
system GMM regressions. For pooled OLS and fixed-effects regressions, parentheses contain standard errors clustered at firm level. Within R-squared is reported for fixed-effects
regressions. For Fama-MacBeth and between-effects models, ordinary standard errors are reported in parentheses. The number of firms and firm-year observations are different for
each model due to unbalanced nature of the dataset. * denotes significance at 0.10 level (2-tailed), ** denotes significance at 0.05 level (2-tailed) and *** denotes significance at 0.01
level (2-tailed). Details regarding abbreviation and definition of variables are presented in Appendix A.1.
Emerging Markets Review 44 (2020) 100718
Appendix B. Computation of long-term effect in dynamic models
Consider the following dynamic panel model.

yit = + yit 1 + x it + it (4)
yit + 1 = + yit + x it + 1 + it + 1 (5)

where,
yit = dependent variable measured for firm i at time t
α = intercept
β = slope coefficient (short-term effect) of lagged value of dependent variable
δ = slope coefficient (short-term effect) of explanatory variable i.e. xit
εit = conventional error term for firm i at time t
As is evident in Eq. (4), the lagged value of dependent variable (yit−1) determines the current value of dependent variable (yit).
Further, since xit affects yit, xit shall also impact yit+1 through yit in the time period t + 1 and the size of this impact shall be βδxit.
Similarly, the impact of xit on yit+2 shall be β2δxit and that on yit+3 shall be β3δxit. Extending this calculation to infinite time periods,
1
we can obtain the cumulative effect of xit on y as 1 x it . Hence, while the short-term coefficient of xit is δ, its long-term coefficient is
1
1
.
Appendix C. Robustness check with t statistic for hypothesis testing
Table C1
Robustness results for relationship between cash holdings and equity ownership of promoter entities.
Model: (3a) (4a) (5a) (6a) (7a) (8a) (9a) (10a)

Variables: Cash/TA Cash/TA Cash/TA Cash/TA Cash/TA Cash/TA Cash/TA Cash/TA
Lagged cash holdings 0.4435*** 0.4331*** 0.4853*** 0.4637*** 0.4808** 0.4510*** 0.2719*** 0.4423***
(0.0393) (0.0398) (0.1463) (0.0408) (0.1897) (0.0735) (0.0805) (0.0661)
Size −0.0024*** −0.0027*** −0.0035 −0.0039*** −0.0012 −0.0010 −0.0046* 0.0011
(0.0008) (0.0009) (0.0028) (0.0013) (0.0025) (0.0012) (0.0024) (0.0025)
Leverage −0.0018 −0.0003 0.0016 0.0042 0.0111 0.0024 0.0181 −0.0772*
(0.0171) (0.0172) (0.0712) (0.0310) (0.0542) (0.0323) (0.0470) (0.0425)
Liquidity −0.0303** −0.0361*** −0.0646 −0.0694*** 0.0395 −0.0207 −0.0582 0.0012
(0.0132) (0.0136) (0.0703) (0.0198) (0.0642) (0.0273) (0.0619) (0.0401)
Profitability 0.0198 0.0071 0.0796 −0.1103 0.0274 0.0481 0.0530 −0.1049
(0.0423) (0.0447) (0.1813) (0.0690) (0.1711) (0.0623) (0.0710) (0.1267)
Growth potential 0.0001 0.0011 −0.0102 0.0056 −0.0055 −0.0014 0.0026 0.0047
(0.0037) (0.0039) (0.0082) (0.0055) (0.0071) (0.0056) (0.0058) (0.0059)
Cash flow 0.0676*** 0.0653*** 0.0305 0.1022*** 0.0622 0.0241 0.0368 0.0255
(0.0177) (0.0181) (0.0589) (0.0277) (0.0753) (0.0383) (0.0352) (0.0553)
Dividend −0.0400 −0.0444 −0.0855 −0.0404 −0.0040 −0.0392 −0.0048 0.0237
(0.0301) (0.0299) (0.2059) (0.0297) (0.1169) (0.0485) (0.0314) (0.0305)
Capex −0.0974*** −0.0803** −0.0870 −0.1229** −0.0982 −0.1068 −0.1076 −0.0580
(0.0352) (0.0354) (0.1168) (0.0485) (0.2000) (0.0797) (0.0850) (0.0724)
CF volatility 0.1673*** 0.1735*** 0.1108 0.1496*** 0.0875 0.1651** 0.2784** −0.0545
(0.0311) (0.0323) (0.1364) (0.0396) (0.1550) (0.0786) (0.1187) (0.0784)
Promoter −0.0089*
(0.0054)
Indian promoter −0.0056
(0.0047)
Indian prom_Banks & FIs −0.1610
(0.2040)
(0.0059)
Indian prom_Govt 0.0125
(0.0497)
Foreign promoter −0.0050
(0.0126)
Foreign prom_NRIs −0.0046
(0.0292)
(0.0437)
2
(Foreign prom_Corporates) 0.1792**
(0.0696)
Intercept 0.0792** 0.0840** 0.1494 0.1174*** 0.0303 0.0651 0.0701 0.0347
(0.0324) (0.0326) (0.2183) (0.0398) (0.1436) (0.0500) (0.0453) (0.0459)
(continued on next page)
20
Table C1 (continued)
Model: (3a) (4a) (5a) (6a) (7a) (8a) (9a) (10a)
Time Period 2001–16 2001–16 2007–16 2007–16 2007–16 2001–16 2007–16 2007–16
Year dummies Yes Yes Yes Yes Yes Yes Yes Yes
Firm-year observations 6991 6864 586 4226 601 2004 954 677
No. of firms 671 666 366 565 368 475 318 202
No. of instruments 72 72 57 58 58 72 58 59
AB AR(1) test p value 0 0 0.6614 0 0.2650 0 0.0066 0.0008
AB AR(2) test p-value 0.1405 0.1536 0.1841 0.8825 0.5879 0.2244 0.6813 0.8746
Sargan-Hansen p-value 0.2225 0.2023 0.2228 0.3409 0.3069 0.1008 0.5895 0.8811
This table shows results for dynamic panel regressions of corporate cash holdings on equity ownership of different categories of
promoters and a group of control variables. The dependent variable is cash and cash equivalents/total assets i.e. Cash/TA.
Parentheses contain standard errors clustered at firm level. The p-values of AB AR(1) and AB AR(2) tests correspond to Arellano and
Bond (1991) test statistics with null hypotheses of absence of first and second order serial correlation in first-differenced residuals
respectively. The p-value of Sargan-Hansen corresponds to a test of over-identifying restrictions (2-step moment functions and 2-step
weighting matrix) with null hypothesis of instrument validity (Sargan, 1958; Hansen, 1982). The number of firms and firm-year
observations are different for each model due to unbalanced nature of the dataset. * denotes significance at 0.10 level (2-tailed), **
denotes significance at 0.05 level (2-tailed) and *** denotes significance at 0.01 level (2-tailed). t statistic has been used to perform
hypothesis testing. Details regarding abbreviation and measurement of variables are presented in Appendix A.1. The results for
models 5a and 7a do not conform to the assumption of first-order serial correlation in the first-differenced error term since the AR(1)
test statistic is statistically insignificant. Thus, findings of both these models may not be considered valid.
Table C2
Robustness results for relationship between cash holdings and equity ownership of non-promoter entities
Model: (11a) (12a) (13a) (14a) (15a) (16a)

Variables: Cash/TA Cash/TA Cash/TA Cash/TA Cash/TA Cash/TA
Lagged cash holdings 0.4435*** 0.4729*** 0.4717*** 0.4424*** 0.4536*** 0.4532***
(0.0394) (0.0359) (0.0429) (0.0388) (0.0489) (0.0413)
Size −0.0024*** −0.0039*** −0.0043*** −0.0024*** −0.0034** −0.0035***
(0.0008) (0.0011) (0.0013) (0.0008) (0.0016) (0.0011)
Leverage −0.0017 0.0121 0.0210 −0.0008 0.0121 0.0191
(0.0171) (0.0156) (0.0219) (0.0174) (0.0206) (0.0301)
Liquidity −0.0300** −0.0318** −0.0423** −0.0344*** −0.0499*** −0.0523***
(0.0131) (0.0130) (0.0171) (0.0128) (0.0193) (0.0193)
Profitability 0.0199 0.0191 −0.0034 −0.0002 0.0205 −0.0192
(0.0422) (0.0389) (0.0487) (0.0422) (0.0548) (0.0709)
Growth potential 0.0001 −0.0009 −0.0020 0.0002 0.0015 0.0036
(0.0037) (0.0039) (0.0058) (0.0037) (0.0052) (0.0048)
Cash flow 0.0676*** 0.0630*** 0.0585** 0.0726*** 0.0362 0.0868***
(0.0177) (0.0188) (0.0278) (0.0179) (0.0270) (0.0264)
Dividend −0.0400 −0.0312 −0.0400 −0.0450 −0.0154 −0.0305
(0.0301) (0.0300) (0.0398) (0.0297) (0.0391) (0.0278)
Capex −0.0971*** −0.0995*** −0.0680 −0.0985*** −0.0824** −0.1342***
(0.0353) (0.0355) (0.0415) (0.0358) (0.0406) (0.0441)
CF volatility 0.1679*** 0.1451*** 0.1525*** 0.1626*** 0.1362*** 0.1612***
(0.0311) (0.0309) (0.0429) (0.0314) (0.0413) (0.0380)
Non-promoter 0.0093*
(0.0054)
Non-promoter_Institutions 0.0275**
(0.0123)
Non-prom_MFs 0.0844**
(0.0403)
Non-prom_Corporates −0.0149*
(0.0087)
Non-prom_FIIs 0.0258
(0.0272)
Non-prom_Small investors 0.0141
(0.0162)
Intercept 0.0699** 0.0710** 0.0821* 0.0825** 0.0584 0.0843**
(0.0330) (0.0320) (0.0428) (0.0320) (0.0411) (0.0399)
Time Period 2001–16 2001–16 2001–16 2001–16 2001–16 2007–16
Year dummies Yes Yes Yes Yes Yes Yes
(continued on next page)
21
Table C2 (continued)
Model: (11a) (12a) (13a) (14a) (15a) (16a)
Firm-year observations 6994 6349 5050 6978 4388 5142

No. of firms 672 664 604 672 589 658
No. of instruments 72 72 72 72 72 58
AB AR(1) test p-value 0 0 0 0 0 0
AB AR(2) test p-value 0.1399 0.8478 0.4389 0.1689 0.9996 0.5362
Sargan-Hansen p-value 0.2205 0.2312 0.1063 0.2483 0.0877 0.2610
This table shows results for dynamic panel regressions of corporate cash holdings on equity ownership of different categories of
non-promoters and a group of control variables. The dependent variable is cash and cash equivalents/total assets i.e. Cash/TA. *
denotes significance at 0.10 level (2-tailed), ** denotes significance at 0.05 level (2-tailed) and *** denotes significance at 0.01 level
(2-tailed). t statistic has been used to perform hypothesis testing. Details regarding abbreviation and measurement of variables are
presented in Appendix A.1. All other estimation specifics and details remain the same as provided in Table C1. The results for model
15a do not conform to the assumption of instrument validity since the Sargan-Hansen test statistic is statistically significant at 10%
level of significance. Thus, findings of this model may not be considered valid.
Table C3
Robustness results for effect of business group affiliation on relationship between corporate cash holdings and promoter ownership.
Model: (17a) (18a) (19a)

Variables: Cash/TA Cash/TA Cash/TA
Lagged Cash Holdings 0.4436*** 0.4642*** 0.4448***
(0.0393) (0.0408) (0.0688)
Size −0.0020** −0.0036*** 0.0013
(0.0009) (0.0014) (0.0027)
Leverage −0.0038 0.0040 −0.0752*
(0.0175) (0.0310) (0.0430)
Liquidity −0.0312** −0.0693*** −0.0009
(0.0132) (0.0198) (0.0410)
Profitability 0.0178 −0.1094 −0.1073
(0.0425) (0.0689) (0.1307)
Growth potential 0.0002 0.0056 0.0046
(0.0037) (0.0055) (0.0060)
Cash flow 0.0675*** 0.1020*** 0.0301
(0.0177) (0.0276) (0.0563)
Dividend −0.0423 −0.0405 0.0230
(0.0303) (0.0297) (0.0323)
Capex −0.0979*** −0.1229** −0.0631
(0.0353) (0.0484) (0.0757)
CF Volatility 0.1657*** 0.1487*** −0.0584
(0.0314) (0.0397) (0.0812)
Promoter −0.0103*
(0.0054)
Promoter*Non-affiliated 0.0046
(0.0031)
(0.0061)
Indian prom_Corporates*Non-affiliated 0.0077
(0.0067)
Foreign promoter_Corporates −0.1239***
(0.0393)
2
(Foreign promoter_Corporates) 0.1847***
(0.0655)
Foreign promoter_Corporates*Non-affiliated 0.0353*
(0.0200)
Intercept 0.0795** 0.1150*** 0.0333
(0.0324) (0.0397) (0.0506)
Time Period 2001–16 2007–16 2007–16
Year dummies Yes Yes Yes
Firm-year observations 6991 4226 677
No. of firms 671 565 202
No. of instruments 73 59 60
AB AR(1) test p-value 0 0 0.0008
AB AR(2) test p-value 0.1387 0.8851 0.8885
Sargan-Hansen p-value 0.2284 0.3402 0.8635
22
This table shows results for dynamic panel regressions of corporate cash holdings on interaction terms concerning business group
affiliation status of a firm and different proxies of promoter ownership along with a group of control variables. The dummy
variable ‘Non-affiliated’ takes a value of 1 when the firm is not affiliated to a business group and 0 when the firm is affiliated to a
business group. The sample includes 1015 non-affiliated firms and 681 firms which belong to business groups. The dependent
variable is cash and cash equivalents/total assets i.e. Cash/TA. * denotes significance at 0.10 level (2-tailed), ** denotes significance
at 0.05 level (2-tailed) and *** denotes significance at 0.01 level (2-tailed). t statistic has been used to perform hypothesis testing.
Details regarding abbreviation and measurement of variables are presented in Appendix A.1. All other estimation specifics and details
remain the same as provided in Table C1.
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Emerging Markets Review: C.P. Gupta, Prateek Bedi T

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Emerging Markets Review 44 (2020) 100718

Contents lists available at ScienceDirect

Emerging Markets Review

Corporate cash holdings and promoter ownership

ARTICLE INFO ABSTRACT

2. Overview of Indian market and institutional environment

3. Literature review and hypotheses development

3.1. Corporate cash holdings and promoter ownership

3.1.1. Quantum of promoter ownership

3.1.2. Investment horizon of promoters

3.1.3. Tunneling hypothesis

4. Data and methodology

4.1. Descriptive statistics

Fig. 1. Evolution of corporate cash holdings and promoter ownership.

Firm fixed effects Pooled OLS

Variables: ∆(Cash/TA)it ∆(Cash/TA)it

5.1. Dynamic adjustment behaviour of corporate cash holdings

5.2. Relationship between corporate cash holdings and promoter ownership

Dependent variable: Cash holdings

Dependent variable: Cash holdings

5.3. Relationship between corporate cash holdings and non-promoter ownership

5.4. Effect of business group affiliation

Dependent variable: Cash holdings

Model 3, Table 3 Promoter −0.0089* (0.0054) −0.0160* (0.0095)

A.1. List of variables with their respective definition and abbreviation

Variable Description Abbreviation Period

A.2. Relevance of dynamic modelling for corporate cash holdings

Dependent variable: Cash holdings

Appendix B. Computation of long-term effect in dynamic models

Consider the following dynamic panel model.

yit + 1 = + yit + x it + 1 + it + 1 (5)

Appendix C. Robustness check with t statistic for hypothesis testing

Model: (3a) (4a) (5a) (6a) (7a) (8a) (9a) (10a)

Dependent variable: Cash holdings

Model: (3a) (4a) (5a) (6a) (7a) (8a) (9a) (10a)

Model: (11a) (12a) (13a) (14a) (15a) (16a)

Dependent variable: Cash holdings

Model: (11a) (12a) (13a) (14a) (15a) (16a)

Firm-year observations 6994 6349 5050 6978 4388 5142

Model: (17a) (18a) (19a)

Dependent variable: Cash holdings

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