Do Firm Boundaries Affect Financing Policy? Evidence from Non-Financial Conglomerates with Financial Subsidiaries

30 Pages Posted: 22 Mar 2011  

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business; University of Pennsylvania - Wharton Financial Institutions Center

Date Written: March 15, 2011

Abstract

I study the capital structure of non-financial firms that own a financial subsidiary. In a panel of U.S. non-financial firms over 1984-2007 I find that a significant part of the overall Compustat non-financial universe maintains a financial subsidiary. Such non-financial firms have higher overall leverage and shorter debt maturity. However, these firms have lower excess leverage. My findings thus appear to support Diamond’s (2006, 2007) hypotheses that the establishment of a financial subsidiary in non-financial firms lowers their borrowing capacity and shortens their debt maturity due perhaps to the weaker incentives to monitor on part of the captive financial subsidiaries. Overall, these findings suggest that firm boundaries are an important factor to determine corporate financing policy. They also highlight an additional cost associated with internal capital markets, namely, the diminished borrowing capacity and shortened debt maturity for non-financial borrowers in internal capital markets.

Keywords: internal capital markets, diversification, capital structure

JEL Classification: G32, G34

Suggested Citation

Litov, Lubomir P., Do Firm Boundaries Affect Financing Policy? Evidence from Non-Financial Conglomerates with Financial Subsidiaries (March 15, 2011). Available at SSRN: https://ssrn.com/abstract=1787722 or http://dx.doi.org/10.2139/ssrn.1787722

Lubomir P. Litov (Contact Author)

University of Oklahoma - Michael F. Price College of Business ( email )

307 West Brooks
Norman, OK 73019-4004
United States

University of Pennsylvania - Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

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