Business Groups with Banks: Investment Efficiency and Tunneling

62 Pages Posted: 1 Jun 2017 Last revised: 9 Nov 2018

See all articles by Craig Brown

Craig Brown

Purdue University - Department of Finance

M. Deniz Yavuz

Purdue University - Krannert School of Management

Date Written: September 10, 2018

Abstract

We examine the role of a bank within a business group consisting of favored firms with greater owner rights, and disadvantaged firms with fewer owner rights. Our results suggest that a bank allows a family owner to tunnel wealth by offering high-yield subordinated debt to favored firms, increasing favored-firm financial revenue; while granting high-interest-rate loans to disadvantaged firms, increasing disadvantaged-firm financial expenses. Correspondingly, a sales-growth shock to the most disadvantaged group firm is met with more financial revenue for favored firms. For disadvantaged firms within family groups, there is also less investment efficiency in the presence of a bank.

Keywords: Banks, Investment Efficiency, Tunneling, Business Groups

JEL Classification: G34, G31, G21, G28, K20

Suggested Citation

Brown, Craig O. and Yavuz, M. Deniz, Business Groups with Banks: Investment Efficiency and Tunneling (September 10, 2018). Available at SSRN: https://ssrn.com/abstract=2977916 or http://dx.doi.org/10.2139/ssrn.2977916

Craig O. Brown (Contact Author)

Purdue University - Department of Finance ( email )

West Lafayette, IN 47907-1310
United States

HOME PAGE: http://craigobrown.me

M. Deniz Yavuz

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

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