The Declining Power of Business Groups and Firms’ Financial Decision-Making

51 Pages Posted: 29 Aug 2016 Last revised: 3 Jan 2020

See all articles by Izidin El Kalak

Izidin El Kalak

Cardiff Business School

Kazuo Yamada

Ritsumeikan University - College of Business Administration

Date Written: January 10, 2018

Abstract

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

Suggested Citation

El Kalak, Izidin and Yamada, Kazuo, The Declining Power of Business Groups and Firms’ Financial Decision-Making (January 10, 2018). Available at SSRN: https://ssrn.com/abstract=2830850 or http://dx.doi.org/10.2139/ssrn.2830850

Izidin El Kalak

Cardiff Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom

Kazuo Yamada (Contact Author)

Ritsumeikan University - College of Business Administration ( email )

2-150 Iwakura
Ibaraki, Osaka 5678570
Japan

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