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Investment Financing in Russian Financial-Industrial Groups

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  • Enrico C. Perotti
  • Stanislav Gelfer

Abstract

We study whether Russian Financial-Industrial Groups facilitate access by Russian firms to investment finance. We compare firms which are members of official Financial Industrial Groups and/or are owned by a large Russian bank with a control set of large firms categorized by dispersed ownership or/and management and employee control. We find that investment is sensitive to internal finance for the second set of firms but not for the first. This is consistent with extensive reallocation of resources within the groups to overcome capital constraints. One interpretation is that group firms have an internal capital market which facilitate access to finance. We test this view against the alternative ossibility that financial reallocation hide opportunistic value transfer across firms. Specifically, we assess the quality of the investment process in group and non group firms by regressing individual firms' absolute and relative investment on our measure of Tobin's Q. The result supports the notion that group firm allocate capital better than independent firms. We then distinguish between bank-led groups, which are more hierarchical, and industry-centered groups which may be more defensive arrangements. While investment is not significantly correlated with cash flow in industry-led group firms (unlike in independent firms), there is a negative significant correlation for bank-led firms, suggesting a more extensive financial reallocation and the use of profitable firms as cash-cows. Most intriguingly, the greater sensitivity of group firms' investment to Q is entirely attributed to firms in bank-led groups, where the controlling bank may have a stronger profit motive and authority to reallocate resources.

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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 242.

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Length: pages
Date of creation: 01 Oct 1998
Date of revision:
Handle: RePEc:wdi:papers:1998-242

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Related research

Keywords: corporate groups; financial constraints; investment; Russia; corporate governance; financial transition;

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Cited by:
  1. Ksenia Yudaeva & Kozlov Konstantin & Natalia Melentieva & Natalia Ponomareva, 2000. "Does Foreign Ownership Matter? Russian Experience," Working Papers w0005, Center for Economic and Financial Research (CEFIR).
  2. Harry Broadman, 2000. "Reducing Structural Dominance and Entry Barriers in Russian Industry," Review of Industrial Organization, Springer, vol. 17(2), pages 155-175, September.
  3. Claessens, Stijn & Djankov, Simeon & Joseph P. H. Fan & Lang, Larry H. P., 1999. "Corporate diversification in East Asia : the role of ultimate ownership and group affiliation," Policy Research Working Paper Series 2089, The World Bank.
  4. Buch, Claudia M. & Heinrich, Ralph P. & Spinanger, Dean & Engerer, Hella & Lodahl, Maria & Schrettl, Wolfram & Schrooten, Mechthild & Gabrisch, Hubert & Sigmund, Peter, 1998. "Die wirtschaftliche Lage Ru├člands: Krise offenbart Fehler der Wirtschaftspolitik. Dreizehnter Bericht," Kiel Discussion Papers 330/331, Kiel Institute for the World Economy (IfW).
  5. Recanatini, Francesca & Ryterman, Randi, 2001. "Disorganization or self-organization : the emergence of business associations in a transition economy," Policy Research Working Paper Series 2539, The World Bank.
  6. Alan Bevan & Saul Estrin & Mark E. Schaffer, 1999. "Determinants of Enterprise Performance during Transition," CERT Discussion Papers 9903, Centre for Economic Reform and Transformation, Heriot Watt University.

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