How Does Intragroup Financing Affect Leverage? Belgian Evidence
Posted: 8 Dec 2005
We hypothesize that the lower costs of asymmetric information and financial distress and the potentially higher tax benefits associated with intragroup debt will cause firms with access to such funds to have higher leverage. The presence of intragroup debt could worsen the relations between the firm and non-group creditors, resulting in lower non-group debt levels. Intragroup guarantees could improve these relationships and thus lead to higher debt levels. We examine how the presence and the amount of intragroup debt are related to total leverage and non-group leverage for 958 large non-financial Belgian firms. Belgian firms provide an interesting case for research on this relationship, as internal capital markets play an important role in their financing. We also analyze the relationship between the presence of intragroup guarantees and leverage of these firms. Our empirical analysis confirms the hypotheses.
Keywords: Leverage, business groups
JEL Classification: G32
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