The Declining Power of Business Groups and Firms’ Financial Decision-Making
51 Pages Posted: 29 Aug 2016 Last revised: 3 Jan 2020
Date Written: January 10, 2018
This paper investigates the consequences of the collapse of the internal capital market on firms’ financial decision making process. To answer this, we analyze a dataset from Japan, where the existence of the traditional bank-oriented “keiretsu” system has been weakening in recent decades. The results reveal that firms in internal capital markets have higher financial leverage and a slower speed of adjustment. We also find that as a banks’ influence weakens, member firms’ financial leverage decreases and their speed of adjustment increases. Several robustness checks ensure consistent results in the basic analyses, such as e.g., excluding firms with extreme financial leverage, controlling for firms’ financial distress, using multiple cut-off points representing different banks’ ownership levels, whether there has been a shift from using bank loans to public bonds due to the decline of the bank’s influence on other member firms.
Keywords: Business groups, Internal capital market, Financial leverage, Speed of adjustment
JEL Classification: G21, G30
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