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This study examines the cash policies of business group members (i.e., affiliates). Using a panel dataset of private Belgian affiliates and comparable non-affiliated firms, the empirical results show that business group affiliates hold significantly smaller amounts of cash as compared to non-affiliated firms. This finding is consistent with the notion that affiliates can afford to keep lower cash reserves because these firms can access the internal capital market of the group. The analysis also combines affiliate level and group level data to evaluate cash drivers and shows that groups in financial distress reduce cash holdings in affiliates. However, affiliates that are more important for the group's reputation and operations maintain cash levels comparable to affiliates belonging to financially healthy groups.

Both U.S. and European firms hold considerable amounts of cash on their balance sheets because of the presence of market imperfections such as information asymmetries, agency problems, transactions costs, and costs of financial distress (e.g., Chen and Chuang, 2009, Ferreira and Vilela, 2004 and Iskandar-Datta and Yonghong, 2012). The cash literature predominantly views the firm as a freestanding company. Yet, in non-Anglo-Saxon countries, many firms have corporate block holders (e.g., La Porta, Lopez de Silanes, Shleifer, & Vishny, 1999). For example, more than half of the largest European non-financial firms have a dominant corporate shareholder (Bureau van Dijk's Amadeus database, version 2009). This type of ownership often results in the creation of a business group, where common stable and long-term equity ownership links legally independent firms together under the control of a corporate owner (i.e., the parent firm) that provides managerial coordination and/or administrative and financial control (Yiu, Lu, Bruton, & Hoskisson, 2007). Group membership may have a significant impact on firms' cash policies. Business groups establish internal capital markets that lower information asymmetries and alleviate financial constraints (e.g., Schiantarelli & Sembenelli, 2000). Intra-group guarantees and group reputation can also improve the availability of external financing (Chang & Hong, 2000). By contrast, some studies also specify certain inefficiencies due to the possible presence of socialism (Scharfstein & Stein, 2000) and minority shareholder expropriation (Bertrand, Mehta, & Mullainathan, 2002). In addition, moral hazard problems can arise as affiliated firms are separate legal entities with their own limited liability. As a result, groups may extract resources from their affiliates and even let these firms go bankrupt without major consequences for the other group members (see e.g., Bianco & Nicodano, 2006). This study contributes to the literature by examining the cash policies of business group affiliates. First, by comparing affiliates with a matched sample of non-affiliated firms, this study pinpoints the impact of group membership on cash policy. Second, this research extends the cash models of affiliates by systematically including both affiliate level and group level characteristics. In this way, the analyses show how group level variables complement individual affiliate characteristics in the design of affiliates' cash policy. Third, this paper evaluates the link between the firm's cash policy and the financial health of the group and provides empirical evidence on the manner in which groups differentiate between affiliates in case of group distress. Overall, this research provides additional insights into the functioning of internal capital markets and sheds more light on the use of financial resources within groups. The existing empirical evidence concerning the cash policies of business group affiliates is extremely scarce. Without making a strict distinction between non-affiliated firms and affiliates, Deloof (2001) reports that intra-group claims negatively affect cash holdings. Pinkowitz and Williamson (2001) focus on the impact of bank power on cash holdings and find that keiretsu members hold less cash than non-member firms. This study uses a panel of large non-financial affiliates of private Belgian domestic business groups and comparable private non-affiliated firms. This sample has several appealing properties. Firstly, as a typical Western European civil law country in a mature market economy, Belgium provides a particularly attractive setting for this study. This country has the highest presence of pyramidal structures and controlling shareholders compared to other industrialized countries (La Porta et al., 1999), and while many studies find evidence of the expropriation of minority shareholders in emerging markets (see e.g., Bertrand et al., 2002 and George and Kabir, 2008), Buysschaert, Deloof, and Jegers (2004) show that, on average, equity sales within Belgian business groups create wealth for minority shareholders. In addition, Belgian accounting law obliges large companies to provide information on intra-group transactions in the notes to the financial statements, which is essential to be able to distinguish between affiliated and non-affiliated firms. Secondly, few studies focus on private business groups, though this type of organizations is a very important economic force. For instance, Dewaelheyns and Van Hulle (2010) report that up to one third of the largest non-financial firms in the Eurozone have ties to private business groups. In addition, comparing private non-affiliated firms to affiliates of private business groups allows for developing clean hypotheses by limiting the impact of external equity financing. Previewing the main results, the analysis shows that the cash policy of affiliates and non-affiliated firms differs after controlling for firm-specific determinants of cash. Business group members hold smaller amounts of cash on their balance sheets than comparable non-affiliated firms. In addition, business group membership enhances or lessens the relationship between certain firm characteristics and cash, though not always as optimization arguments would predict. The data also show that group health affects affiliates' cash policy. More specifically, financial distress at group level negatively affects the cash holdings of business group affiliates, even after controlling for several group level and affiliate level characteristics. Yet, affiliates that receive intra-group guarantees, generate a large part of the total group's sales, or are active in the core industry of the group hold cash reserves comparable to affiliates belonging to financially healthy groups. This result suggests that groups in distress focus on maintaining sufficiently high cash levels in affiliates that are important for group survival. Overall, the evidence supports the notion of optimization behavior within groups, even though some room for improvement remains. The remainder of the paper proceeds as follows. Section 2 develops hypotheses concerning the cash holdings of affiliates and discusses the control variables used in the analysis. Section 3 describes the sample and provides univariate statistics and tests. Section 4 contains the results of the multivariate empirical analyses. Finally, Section 5 concludes.

This paper is the first to empirically examine the impact of group membership on affiliates' cash policy using a sample of non-affiliated firms as a benchmark. To offer a more comprehensive understanding of affiliates' cash policy, the analysis includes both firm and group level characteristics and examines in detail the impact of group financial distress. The results show that business group affiliates hold smaller amounts of cash on their balance sheets as compared to a matched sample of non-affiliated firms. Overall, groups use their organizational structure to reduce cash reserves in affiliates. Nevertheless, the results also indicate that affiliated firms may maintain some slack cash. In addition, group distress has a negative impact on affiliates' cash holdings. However, distressed groups prove to give affiliates that are important for the group's operations and/or reputation a more favorable treatment. In particular, distressed groups maintain cash reserves comparable to the cash reserves of affiliates of financially healthy groups in affiliates that receive intra-group guarantees, in affiliates that are active in the core industry of the group or generate a large part of total group sales. This selectivity highlights the potential for moral hazard problems inherent in the limited liability of individual affiliates. The preceding findings also show that intra-group guarantees help in reducing these problems. While this study focuses on the average cash levels of affiliated firms, the comparison of the cash adjustment process between affiliates and non-affiliated firms may be an interesting topic for further research as well. One of the advantages of affiliation is the possibility to resort to an internal capital market when an adverse shock affects the affiliates' optimal cash holdings. Furthermore, a growing body of papers shows that non-affiliated firms' cash reserves can function as a buffer against predatory behavior of competitors. Whether or not the internal capital market can protect affiliates against such behavior could be another topic for future research. Finally, as the alleviation of financing constraints is one of the key rationales for groups to exist, the comparison of the cash policies of listed with non-listed affiliates may yield new insights as well.