Business Group Affiliation and Bank Loan: International Evidence

Abstract

This paper examines the effect of business group affiliation on the costs of corporate borrowing and the countervailing effects of “co-insurance” and “tunneling” in business group affiliated companies. Using a unique panel data set covering 25 countries around the world, I find that companies affiliated with business groups, as a whole, are more likely to have lower interest spreads than stand-alone companies, supporting the view of “co-insurance”. I also find that the “co-insurance” effect of business group affiliation declines and the “tunneling” effect increases as an affiliate’s location moves down along the pyramidal chain of its group, so that the affiliates located at the bottom of a pyramidal chain show an opposite relationship, i.e. more likely to have higher interest spreads than stand-alone companies. Moreover, the “co-insurance” effect is stronger in the countries with lower creditor rights protection or in the period of financial crisis, and the “tunneling” effect is stronger when the ultimate owner of the affiliates is a family firm. These findings provide empirical evidence that “co-insurance” effect comes with a “tunneling” tradeoff in business groups and group structure matters in the costs of corporate borrowing.

Date of Award	11 Jun 2018
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Cheong Heon YI (Supervisor)