The Impact of Vertical Interlock on Corporate Cash Distribution: Evidence from China

Abstract

This study investigates how vertical interlock influences cash allocation patterns using Chinese A-share listed firms from 2008 to 2019. Empirical evidence demonstrates that vertical interlock significantly concentrates cash holdings in parent companies (listed companies), with significant heterogeneity, particularly in indirect vertical interlock, interlocking Chairman, non-state-owned enterprises, and firms without Big Four auditor appointments. Mechanistically, we find that the suppressed strategic aggressiveness and amplified financing constraints caused by vertical interlock are closely related to the increase of parent company's cash holdings.

Keywords: Vertical interlock, Cash distribution, Business strategy, Financing Constraints