Dividend from subsidiaries and the agency cost of business groups

The subsidiary's profit distribution results in the cash transfer from the subsidiary to the parent company. We investigate the effect of this cash transfer on the business group's agency cost. Using the sample of A-share listed companies in China from 2006 to 2017, we find that the profits distributed by subsidiaries lead to the decrease of the agency costs of the business group as a whole. The channel analysis reveals that the profits are transferred to parent company whose governance efficiency is relatively higher and the total free cash flows are reduced. Further research finds that the agency cost reduced effect is more significant in business groups with higher subsidiary business importance and subsidiary debt financing importance, and in groups with lower growth of the subsidiary. Finally, we report that the subsidiary's profit distribution has value-added effect. This paper generates new insights into the "black box" of the internal operation of business groups and provides comprehensive implications for policy makers.