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How do business group firms utilize internal capital markets?

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  • Halit Gonenc

Abstract

Purpose - The purpose of this study is to provide evidence for how business group firms transfer financial resources among affiliated firms by examining the differences in the level of debt financing and the choices of new equity financing between group affiliated and non‐affiliated firms in an emerging market, Turkey. The role of affiliated banks for internal capital market transactions is also to be examined. Design/methodology/approach - Univarite analysis and simple pooled OLS regression analysis are performed to examine the role of group affiliation on the level of several debt financing measures. Additionally, a Logit regression analysis is used to analyze the behavior of affiliated firms in their equity financing decisions by issuing new shares. Findings - Group affiliated firms transfer funds in the group by using transactions such as trade debt, and issuing cash rights and bonus shares. The affiliated firms – especially with a bank in the group – support their higher growth with new equity issues in the forms of cash rights and bonus shares along with higher trade debt. Moreover, non‐affiliated firms utilize a higher percentage of debt to shareholders, while affiliated firms without a bank utilize a higher financial debt. These findings are consistent with the idea that the role of the group bank is very important in financing choices of affiliated firms. Research limitations/implications - This paper provides direct measures of external and internal funds by focusing on new equity issues and debt structure, which can be applied in different economic environments, rather than using indirect measures or not readily available datasets such as connected party transactions. Originality/value - The paper provides additional evidence to assess the efficiency of the use of internal capital markets. Moreover, the role of group affiliated banks among affiliated firms has not yet been extensively addressed in the literature and an examination of this issue leads to a better understanding of their roles in diversified business groups.

Suggested Citation

  • Halit Gonenc, 2009. "How do business group firms utilize internal capital markets?," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 5(4), pages 360-375, September.
    • Handle: RePEc:eme:ijmfpp:v:5:y:2009:i:4:p:360-375
    DOI: 10.1108/17439130910987521
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    References listed on IDEAS

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    1. Gonenc, Halit & Hermes, Niels, 2008. "Propping: Evidence from new share issues of Turkish business group firms," Journal of Multinational Financial Management, Elsevier, vol. 18(3), pages 261-275, July.
    2. Hakan Orbay & B. Burcin Yurtoglu, 2006. "The Impact of Corporate Governance Structures on the Corporate Investment Performance in Turkey," Corporate Governance: An International Review, Wiley Blackwell, vol. 14(4), pages 349-363, July.
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    5. Randall Morck, 2005. "How to Eliminate Pyramidal Business Groups: The Double Taxation of Intercorporate Dividends and Other Incisive Uses of Tax Policy," NBER Chapters, in: Tax Policy and the Economy, Volume 19, pages 135-179, National Bureau of Economic Research, Inc.
    6. Heitor V. Almeida & Daniel Wolfenzon, 2006. "A Theory of Pyramidal Ownership and Family Business Groups," Journal of Finance, American Finance Association, vol. 61(6), pages 2637-2680, December.
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    Cited by:

    1. Elif Akben Selcuk & Pinar Sener, 2018. "Corporate Governance and Tunneling: Empirical Evidence from Turkey," Economics Bulletin, AccessEcon, vol. 38(1), pages 349-361.

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