Investment Financing in Russian Financial-Industrial Groups

We study whether Russian Financial-Industrial Groups facilitate access by Russianfirms to investment finance. We compare firms which are members of official FinancialIndustrial Groups and/or are owned by a large Russian bank with a control set of large firmscategorized by dispersed ownership or/and management and employee control. We find thatinvestment is sensitive to internal liquidity for the second set of firms but not for the first. Thisis consistent with extensive reallocation of resources within the groups to overcome capitalconstraints.One interpretation is that group firms have an internal capital market which facilitateaccess to finance. We test this view against the alternative possibility that financial reallocationhide opportunistic value transfer across firms. Specifically, we assess the quality of theinvestment process in group and non group firms by regressing individual firms’ absolute andrelative investment on our measure of Tobin’s Q. The result supports the notion that groupfirm allocate capital better than independent firms.We then distinguish between bank-led groups, which are more hierarchical, andindustry-centered groups which may be more defensive arrangements. While investment is notsignificantly 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 extensivefinancial reallocation and the use of profitable firms as cash-cows. Most intriguingly, thegreater sensitivity of group firms’ investment to Q is entirely to be attributed to firms in bankledgroups, where the controlling bank may have a stronger profit motive and authority toreallocate resources.Finally, independent firms with significant stock market trading appear also lessliquidity constraints, suggesting that the Russian equity market may already provide a positiveinformational function.