Title: Financial flows within business groups.
Other Titles: Financial flows within business groups.
Authors: Locorotondo, Rosy
Issue Date: 30-Oct-2014
Abstract: In contrast to the popular assumption of independence made in the corporate finance literature, many companies around the world are linked through corporate ownership to form business groups. This dissertation provides a more comprehensive understanding whether and through what channels business group membership impacts the corporate finance policies of business group members.As business groups have several defining characteristics and can be found all over the world taking on many different forms, this dissertation starts with an introduction to business groups in Chapter 1. This chapter also reviews the growing literature on the consequences of business group membership. The trade-off between these consequences leads to mixed empirical evidence on the impact of group affiliation on profitability and innovation.Chapter 2 examines the impact of business group membership on firms' cash policies. 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. Furthermore, this chapter also shows how group characteristics - financial health of the group in particular - complement affiliate-level characteristics in the design of affiliates' cash policies. The results indicate that affiliates belonging to distressed groups hold less than affiliates belonging to a financially healthy group. However, affiliates that are more important for the group's reputation and operations maintain cash levels comparable to affiliates belonging to healthy groups. Overall, the results are line with optimizing behavior within groups.Chapter 3 examines whether and how bank debt is affected by foreign group affiliation. Ceteris paribus, the bank debt concentrations of foreign affiliates is about half the size of the bank debt concentrations of affiliates of domestic business groups. Several channels are identified through which parent firm location affect the bank debt concentrations of affiliated firms. First of all, the results indicate that geographical and cultural distance between parent and affiliate countries raise barriers when accessing bank financing. The bank debt usage decreases even further if affiliates and parent firms depend on different legal systems or the degree of legal enforcement in the parent firm's country is low.A comprehensive framework on group-wide optimization concerning the attracting of external debt is put forward in Chapter 4. This chapter argues that groups have the possibility to weight the benefits arising from economies of scale resulting from contracting debt in a centralized manner against the benefits of attracting debt at affiliate-level. By exploiting variation in the listing status of the parent firm, the results indicate that listed groups are better able to take advantage of the possibilities their organizational structure provides to minimize costs because of the lower degree of asymmetric information accompanying the parental listed status. In particular, the results suggest that these smaller information asymmetries allow listed groups to organize their debt in a more centralized manner as their affiliates have lower target external debt ratios. Further, the target ratios of affiliates of listed groups are mainly driven by group-characteristics that proxy for group-level trade-off considerations. For affiliates of unlisted groups, however, the target ratios are only affected by affiliate-level trade off variables. Patterns found for affiliates' short-term leverage adjustments are also in line with these arguments.
Table of Contents: Introduction

Chapter 1 The Consequences of Business group Membership: A Review of the Literature
1.1 Introduction
1.2 Benefits and Costs Associated with Business Group Affiliation
1.2.1 Alleviation of Market Imperfections
1.2.2 Enhanced Access to External Capital Markets
1.2.3 Provision of Mutual Insurance
1.2.4 Agency Problems
1.2.5 Political Rent-seeking
1.2.6 Market Power
1.3 Business Group Performance
1.3.1 Profitability
1.3.2 Innovation
1.4 Conclusion

Chapter 2 Cash Holdings and Business Group Membership
2.1 Introduction
2.2 Cash Policy and Business Groups
2.2.1 Hypotheses
2.2.2 Firm-Specific Determinants of Cash
2.2.3 Group-Specific Variables
2.3 Sample and Descriptive Statistics
2.3.1 Sample Selection
2.3.2 Univariate Statistics
2.4 Regression Results
2.5 Conclusion

Chapter 3 Affiliates’ Bank Debt Policy: Does Parent Firm Nationality Matter?
3.1 Introduction
3.2 Related Literature and Hypotheses development
3.2.1 Geographical and Cultural Distance
3.2.2 The Institutional Environment of the Parent Firm
3.3 Methodology and Data
3.3.1 Measuring Private Affiliates’ Bank Financing
3.3.2 Sample Selection and Descriptive Statistics
3.4 Main Results
3.4.1 Firm- and Group-Level Determinants of Bank Debt
3.4.2 Parent Firms’ Home Country Effects: Distance and the Legal Environment
3.4.3 Additional Tests and Robustness
3.5 Conclusion

Chapter 4 The External Debt Policies of Affiliated Firms: The Value Added of the Parental Listing Status
4.1 Introduction
4.2 Related Literature and Hypotheses Development
4.2.1 Stock Listing and Debt Financing
4.2.2 Affiliates’ External Target Leverage Ratios and the Parent Firm’s Listing Status
4.2.3 Affiliates’ Short Term External Leverage Adjustments and the Parent Firms’ Listing Status
4.3 Sample Selection
4.4 Method & Results
4.4.1 Variable Definitions and Descriptive Statistics
4.4.2 Affiliates’ External Leverage Target Ratios
4.4.3 Determinants of External Leverage Adjustments
4.5 Conclusion

General Conclusion
Publication status: published
KU Leuven publication type: TH
Appears in Collections:Research Center Finance, Leuven
Department of Financial Management, Campus Carolus Antwerp
Faculty of Economics and Business (FEB) - miscellaneous

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