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Internal Capital Markets and Capital Structure: Bank Versus Internal Debt

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  • Nico Dewaelheyns
  • Cynthia Van Hulle

Abstract

We argue that domestic business groups are able to actively optimise the internal/external debt mix across their subsidiaries. Novel to the literature, we use bi†level data (i.e. data from both individual subsidiary financial statements and consolidated group level financial statements) to model the bank and internal debt concentration of non†financial Belgian private business group affiliates. As a benchmark, we construct a size and industry matched sample of non†group affiliated (stand†alone) companies. We find support for a pecking order of internal debt over bank debt at the subsidiary level which leads to a substantially lower bank debt concentration for group affiliates as compared to stand†alone companies. The internal debt concentration of a subsidiary is mainly driven by the characteristics of the group's internal capital market. The larger its available resources, the more intra†group debt is used while bank debt financing at the subsidiary level decreases. However, as the group's overall debt level mounts, groups increasingly locate bank borrowing in subsidiaries with low costs of external financing (i.e. large subsidiaries with important collateral assets) to limit moral hazard and dissipative costs. Overall, our results are consistent with the existence of a complex group wide optimisation process of financing costs.

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  • Nico Dewaelheyns & Cynthia Van Hulle, 2010. "Internal Capital Markets and Capital Structure: Bank Versus Internal Debt," European Financial Management, European Financial Management Association, vol. 16(3), pages 345-373, June.
  • Handle: RePEc:bla:eufman:v:16:y:2010:i:3:p:345-373
    DOI: 10.1111/j.1468-036X.2008.00457.x
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    6. Białek-Jaworska Anna & Krawczyk Tomasz, 2019. "Corporate bonds or bank loans? The choice of funding sources and information disclosure of Polish listed companies," Central European Economic Journal, Sciendo, vol. 53(6), pages 262-285, January.
    7. Jarle Møen & Dirk Schindler & Guttorm Schjelderup & Georg Wamser, 2018. "The Tax-Efficient Use of Debt in Multinational Corporations," CESifo Working Paper Series 7133, CESifo.
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    9. Kim, Hyonok & Wilcox, James A. & Yasuda, Yukihiro, 2020. "Internal and External Lending by Nonfinancial Businesses," Working Paper Series G-1-23, Hitotsubashi University Center for Financial Research.
    10. Asmund Rygh & Gabriel R. G. Benito, 2018. "Capital Structure of Foreign Direct Investments: A Transaction Cost Analysis," Management International Review, Springer, vol. 58(3), pages 389-411, June.
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