The Internal Capital Markets of Business Groups: Evidence from Intra-Group Loans

Abstract

We study business groups’ internal capital markets using a unique data set on intra-group lending in Chile (1990-2009). In line with groups’ financing advantage, firms that borrow internally have higher investment, leverage, and ROE than other firms. At the margin, controlling shareholders have higher cash-flow rights in borrowing firms than in lending firms. However, there is no robust evidence of minority shareholders losing out from intra-group loans as tunneling predicts. Our evidence is consistent with the idea that strict regulation and disclosure requirements for intra-group loans, which are features of the Chilean market, reduce the risk of expropriation in pyramids.

Keywords: business groups, internal capital markets, expropriation

JEL Classification: G30, G32