On the Financial Efficiency and Control in Business Groups

73 Pages Posted: 7 Apr 2010 Last revised: 4 Jul 2011

See all articles by Jongsub Lee

Jongsub Lee

University of Florida - Warrington College of Business Administration

Date Written: January 19, 2010

Abstract

I present a theory of how capital structure and control structure co-vary in business groups. A controlling party of a business group adopts the pyramidal structure with excess internal capital to overcome restrictions on external financing imposed by control benefits. External financing capacity of the pyramid is maximal when highly leveraged parent firms are financially supported by the dividends of low-leveraged subsidiaries, which further promotes the pyramid. In contrast, business groups without this control constraint are horizontal and highly leveraged, facilitating the maximization of security cash flow benefits. These predictions are empirically confirmed for Korean family business groups.

Keywords: Control benefits, internal capital, capital structure, dividends, pyramid, horizontal structure, chaebols

JEL Classification: G32, G34

Suggested Citation

Lee, Jongsub, On the Financial Efficiency and Control in Business Groups (January 19, 2010). Available at SSRN: https://ssrn.com/abstract=1586149 or http://dx.doi.org/10.2139/ssrn.1586149

Jongsub Lee (Contact Author)

University of Florida - Warrington College of Business Administration ( email )

Department of Finance Insurance & Real Estate
P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-273-4966 (Phone)
352-392-0301 (Fax)

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