The Relevance between Group's Internal Capital Market and Cash Holdings: Based on the Moderating Effect of Bank Debt’s Intervention

Abstract

Based on the monitoring effect of creditors, this paper examines the relevance between group’s internal capital market and cash holdings. We find that the groups have become the economic pillar organization in China, but groups’ internal capital markets generally exist the inefficient phenomena. We further find that the group's members on average have more cash holdings than independent companies and the moderating effect of bank debt’s intervention can strengthen the negative relevance between internal capital market and cash holdings. Our findings suggest that groups should follow the pace of economic reform to enhance efficiency of internal capital market and reduce cash holdings by the way of appropriate bank debt.