Financially Interlinked Business Groups

Posted: 14 Aug 2001

See all articles by Raja Kali

Raja Kali

University of Arkansas - Department of Economics

Maitreesh Ghatak

London School of Economics (LSE) - Department of Economics

Abstract

Financial interlinkage, in the form of cross-holding of equity and debt between firms, characterize business groups in many countries. We suggest that such financial interlinkage can be viewed as a way to solve credit rationing caused by asymmetric information. If firms possess better information about each other than a bank, then business groups can be a mechanism to induce firms to sort on the basis of this information. Banks can offer a menu of contracts that vary in the extent of financial interlinkage to induce firms to self-select on the basis of the equilibrium composition of the business groups they can form.

Keywords: Business groups, cross-holding of debt and equity, financial interlinkage

JEL Classification: G30, L14, D82, O16

Suggested Citation

Kali, Raja and Ghatak, Maitreesh, Financially Interlinked Business Groups. Available at SSRN: https://ssrn.com/abstract=272934

Raja Kali (Contact Author)

University of Arkansas - Department of Economics ( email )

Sam M. Walton College of Business
Fayetteville, AR 72701
United States
479-575-6219 (Phone)
479-575-3241 (Fax)

HOME PAGE: http://wcob.uark.edu/rkali/index.html

Maitreesh Ghatak

London School of Economics (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom
44 20 7852 3568 (Phone)
44 20 7955 6951 (Fax)

HOME PAGE: http://sticerd.lse.ac.uk/dps/adds/ghatak/cv-lse-sept02.pdf

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
712
PlumX Metrics