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Red Barons or Robber Barons? Governance and Financing in Russian FIG

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  • Gelfer, Stanislav
  • Perotti, Enrico C

Abstract

We study the governance role of Russian Financial-Industrial Groups (FIG) and their impact on financing of investment. We compare member firms of a group 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; in fact, we find that cash flow is negatively correlated with investment in the FIG group firms. This is consistent with extensive reallocation of resources within the groups. One interpretation is that groups have an internal capital market which redirects finance to firms with better investment opportunities. We test this view against the alternative possibility 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' investment on our measure of Tobin's Q. The result supports the notion that group firm allocate capital better than independent firms, although it does not rule out the possibility of private appropriation of value. We then distinguish between bank-led groups, which are more hierarchical, and industry-centered groups which may be more defensive arrangements. Investment is not significantly correlated with cash flow in industry-led group firms (unlike in independent firms), while the negative correlation is entirely due to bank-led group firms, suggesting a more extensive financial reallocation and the use of profitable firms as cash-cows. Intriguingly, also the greater sensitivity of group firms' investment to Q is entirely to be attributed to firms in bank-led groups, where the controlling bank may have a stronger profit motive and authority to reallocate resources.

Suggested Citation

  • Gelfer, Stanislav & Perotti, Enrico C, 1999. "Red Barons or Robber Barons? Governance and Financing in Russian FIG," CEPR Discussion Papers 2204, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:2204
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    Citations

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    Cited by:

    1. Perotti, Enrico C. & Vesnaver, Luka, 2004. "Enterprise finance and investment in listed Hungarian firms," Journal of Comparative Economics, Elsevier, vol. 32(1), pages 73-87, March.
    2. Claessens, Stijn & Fan, Joseph P.H. & Lang, Larry H.P., 2006. "The benefits and costs of group affiliation: Evidence from East Asia," Emerging Markets Review, Elsevier, vol. 7(1), pages 1-26, March.
    3. Marin, Dalia & Huang, Haizhou & Xu, Chenggang, 2002. "Financial Crisis, Economic Recovery and Banking Development in Former Soviet Union Economies," Discussion Papers in Economics 27, University of Munich, Department of Economics.
    4. Yishay Yafeh, 2002. "An International Perspective of Japan's Corporate Groups and their Prospects," NBER Working Papers 9386, National Bureau of Economic Research, Inc.
    5. Khanna, Tarun, 2000. "Business groups and social welfare in emerging markets: Existing evidence and unanswered questions," European Economic Review, Elsevier, vol. 44(4-6), pages 748-761, May.
    6. Mario Gara, 2001. "The Emergence of Non-monetary Means of Payment in the Russian Economy," Post-Communist Economies, Taylor & Francis Journals, vol. 13(1), pages 5-39.

    More about this item

    Keywords

    conglomerate groups; Corporate Governance; Credit Constraints; Emerging Markets; RU;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • P50 - Economic Systems - - Comparative Economic Systems - - - General

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