Business Groups with Banks: Investment Efficiency and Tunneling
62 Pages Posted: 1 Jun 2017 Last revised: 9 Nov 2018
Date Written: September 10, 2018
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
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