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Internal Capital Markets in Family Business Groups During the Global Financial Crisis

65 Pages Posted: 2 Nov 2014 Last revised: 15 Feb 2015

Alvin Ang

UNSW Business School, University of New South Wales

Ronald W. Masulis

University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Peter K. Pham

Australian School of Business - University of New South Wales; Financial Research Network (FIRN)

Jason Zein

UNSW Business School; Financial Research Network (FIRN)

Date Written: February 15, 2015

Abstract

This study investigates how family business group members’ investment decisions are affected by an exogenous shock, namely the 2008 Global Financial Crisis (GFC). Specifically, we investigate whether the internal capital markets in family business groups around the world alleviate the financial crisis-induced external financing constraints. We find that during the GFC the family group-affiliated firms on average cut investments by less than similar standalone firms. We also find that investments of group firms during the GFC become less sensitive to their own cash flows and more sensitive to the cash flows of other group members, especially those with greater financial slack, compared to the pre-crisis period. For a subsample of diversified groups, we propose an identification strategy, which shows that the post-crisis change in a group firm’s investment is determined by exogenous variations in its affiliated firms’ cash flows. Finally, we find that groups utilize equity primarily in the form of seasoned equity offerings (SEOs) to channel capital to affiliated firms during the GFC. The evidence highlights the important capital allocation role performed by the internal capital markets of business groups when external markets function poorly.

Keywords: Internal capital markets, Family business groups, External financing constraints, Financial crisis

JEL Classification: G01, G31, G32

Suggested Citation

Ang, Alvin and Masulis, Ronald W. and Pham, Peter K. and Zein, Jason, Internal Capital Markets in Family Business Groups During the Global Financial Crisis (February 15, 2015). Asian Finance Association (AsianFA) 2015 Conference Paper. Available at SSRN: https://ssrn.com/abstract=2517810 or http://dx.doi.org/10.2139/ssrn.2517810

Alvin Ang (Contact Author)

UNSW Business School, University of New South Wales ( email )

Sydney, NSW 2052
Australia

Ronald Masulis

University of New South Wales - Australian School of Business ( email )

Sydney, NSW 2052
Australia
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Peter Pham

Australian School of Business - University of New South Wales ( email )

Sydney, NSW 2052
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Jason Zein

UNSW Business School ( email )

Sydney, NSW 2052
Australia
+61 2 93855858 (Phone)
+61 2 93855858 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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