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Internal Capital Market and Dividend Policies: Evidence From Business Groups

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  • Radhakrishnan Gopalan
  • Vikram Nanda
  • Amit Seru

Abstract

We argue that internal capital market imperatives of business groups i.e., reallocation of capital across group firms, influences an affiliated firm's dividend policy. Intuition is developed in a model in which business group insiders distribute dividends from cash-rich firms and use their share of payout to invest in other affiliated firms. Employing multi-country panel-data, we find support for this channel: Dividends by a group firm are positively related with equity-financed investments by its affiliated firms. Results are corroborated by exploiting variation in a firm's investment opportunity generated by changes in import tariff policy: a shock to investment opportunity of an affiliated firm is propagated to dividend policies of other firms in its group.

Suggested Citation

  • Radhakrishnan Gopalan & Vikram Nanda & Amit Seru, 2014. "Internal Capital Market and Dividend Policies: Evidence From Business Groups," Review of Financial Studies, Society for Financial Studies, vol. 27(4), pages 1102-1142.
    • Handle: RePEc:oup:rfinst:v:27:y:2014:i:4:p:1102-1142.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhu004
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