Red Barons or Robber Barons? Governance and Financing in Russian Financial-Industrial Groups

24 Pages Posted: 7 Dec 1999

See all articles by Enrico C. Perotti

Enrico C. Perotti

University of Amsterdam - Finance Group; Centre for Economic Policy Research (CEPR)

Stanislaw Gelfer

Credit Suisse First Boston

Multiple version iconThere are 2 versions of this paper

Date Written: July 1999


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.

JEL Classification: E58, G21, P50

Suggested Citation

Perotti, Enrico C. and Gelfer, Stanislaw, Red Barons or Robber Barons? Governance and Financing in Russian Financial-Industrial Groups (July 1999). Available at SSRN: or

Enrico C. Perotti (Contact Author)

University of Amsterdam - Finance Group ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TV
+31 20 525 4159 (Phone)
+31 20 525 5285 (Fax)


Centre for Economic Policy Research (CEPR)

United Kingdom

Stanislaw Gelfer

Credit Suisse First Boston

11 Madison Avenue
New York, NY 10010
United States

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