Regulatory enforcement of minority shareholder rights and corporate cash holdings

In theory, enhanced legal protection for minority shareholders may have two opposing effects on corporate cash holdings. Firstly, improved corporate governance could ease external financing and lead to reduced cash reserves. Secondly, the reinforcement of shareholder litigations could induce firms to increase their cash holdings as a precaution. In this study, we leverage the implementation of the China Securities Investor Services Center (CSISC) shareholding reform program to examine these competing views. Our analysis reveals compelling evidence that the CSISC reform has significantly reduced cash holdings among firms in the pilot provinces, endorsing its governance benefit on average. Moreover, we demonstrate that this negative effect is more notable for firms with severe agency issues, while weaker for those undergoing litigations and regulatory penalties.