Financially Interlinked Business Groups
Posted: 14 Aug 2001
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: Suggested Citation