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The Internal Capital Markets of Business Groups: Evidence from Intra-Group Loans

66 Pages Posted: 14 Oct 2013  

David Buchuk

University of Houston - C.T. Bauer College of Business

Borja Larrain

Pontificia Universidad Catolica de Chile

Mounu Prem

Universidad del Rosario

Francisco Urzúa I.

Erasmus University

Date Written: October 4, 2013

Abstract

We study business groups’ internal capital markets using a unique data set on intra-group lending in Chile (1990-2009). In line with groups’ financing advantage, firms that borrow internally have higher investment, leverage, and ROE than other firms. At the margin, controlling shareholders have higher cash-flow rights in borrowing firms than in lending firms. However, there is no robust evidence of minority shareholders losing out from intra-group loans as tunneling predicts. Our evidence is consistent with the idea that strict regulation and disclosure requirements for intra-group loans, which are features of the Chilean market, reduce the risk of expropriation in pyramids.

Keywords: business groups, internal capital markets, expropriation

JEL Classification: G30, G32

Suggested Citation

Buchuk, David and Larrain, Borja and Prem, Mounu and Urzúa I., Francisco, The Internal Capital Markets of Business Groups: Evidence from Intra-Group Loans (October 4, 2013). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2335974

David Buchuk

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Borja Larrain (Contact Author)

Pontificia Universidad Catolica de Chile ( email )

Ave. Vicuna Mackenna 4860, Macul
Santiago
Chile

HOME PAGE: http://economiayadministracion.uc.cl/personal/blarrain/

Mounu Prem

Universidad del Rosario ( email )

Casa Pedro Fermín
Calle 14 # 4-69
Bogota
Colombia

Francisco Urzua

Erasmus University ( email )

Burgemeester Oudlaan 50
Rotterdam, 3000DR
Netherlands

HOME PAGE: http://sites.google.com/site/furzuai/

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