Business group affiliation, corporate diversification, and cash holdings

This paper investigates how horizontal business group affiliation affects cash holdings of member firms. Although firm-bank lending and equity ties have weakened since the 1990s, Japanese horizontal keiretsu may still have some financial benefits. We focus on the impact of horizontal business group affiliation on unprofitable cash holdings, which has been one of the most important managerial issue in the past two decades. Using the samples of Japanese firms from 2004 to 2014, we find that horizontal business group affiliation reduces cash holdings even after controlling for firm-bank equity and lending ties. We argue that stable business ties among group firms reduce uncertainty for future cash flows and thus mitigate precautionary demands for cash. Our results also suggest that horizontal business affiliation plays a similar role with corporate diversification in reducing cash holdings.