The Effect of Conversion to Holding Companyon Investment Efficiency
Asian Tax Journal Vol. 21 No. 1 (2020), pp. 31-64
Abstract
This study empirically analyzes whether holding company conversion affects investment decision making. If large corporate groups, which had complex mutual and circular shareholdings, switch to holding companies, the ownership of the controlling shareholders will increase, and the ownership wedge(the wedge between voting right and cash flow right) will be reduced, thereby improving corporate governance. The hypothesis of this study was established based on the expectation that the conversion to holding company would improve the corporate governance and the quality of accounting earnings, and that these expected effects would have a positive effect on investment efficiency. The empirical analysis was conducted by setting the hypothesis that the conversion to holding company will have a negative relationship with the absolute value of the investment efficiency measure. The empirical analysis was conducted on companies belonging to the company group that reported to the Fair Trade Commission as a general holding company during the 2008－2016 period. After the transition to the holding company, the corporate governance structure and the quality of accounting earnings improved, resulting in a decrease in the absolute value of the investment efficiency measure. Therefore, it can be seen that the expected effect of switching to a holding company improves the investment efficiency. In addition, we analyzed the effect on investment efficiency by dividing the entire sample into over－investment and under－investment. The transition to a holding company has a positive effect on the improvement of corporate governance and the quality of accounting earnings and significantly reduces over－investment. However, holding company conversion did not have a statistically significant effect on under－investment. In addition, the conversion to holding company has an additional effect on the positive relation between foreign ownership and investment efficiency, and the negative relation between absolute value of discretionary accruals and investment efficiency. Additional test using two－stage least squares employed multiple regressions and provided consistent results. This study analyzed the effect of holding company conversion on investment efficiency by using methodology and approach that can complement existing research. In other words, using the two－stage least squares and the interaction effect, we analyzed the positive effect of the improvement of corporate governance structure and accounting information quality, due to the conversion to holding company, on investment efficiency. The results of this study are also expected to provide theoretical support for the transition of corporate governance to a holding company system and to provide investors with directions for investment decision making.
Keywords
- Conversion to holding company
- Investment efficiency
- Corporate governance
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