Abstract Using a sample of Chinese listed firms during the period of 2001—2016, this paper empirically examines the influence of internal capital allocation within business groups on their cash holdings and its influencing mechanism. The results indicate that cash holdings of groups decrease when parent companies provide financial support to subsidiaries, which helps alleviate the financing constraints on the entire group. When taking monetary policy in account, a further study shows that the effect is weakened by tight-money policy. This shows that internal capital allocation can alleviate financing constraints to some extent, thus reduce the cash holdings of groups. However, tight-money policy will increase cash holding out of precautionary motive of groups and impair the function of internal capital allocation.
2018, Vol. 35 
