Pyramidal Ownership Structure and Cost of Bank Loans: Evidence from Indonesian Business Groups

Abstract

This paper examines the relation between pyramidal ownership structure and cost of bank loans using a data set on bank loan contracts of Indonesian business groups (2006-2016). Consistent with groups’ financing advantage, banks charge lower loan prices to group members located at lower layers of a pyramidal chain and with higher proportions of direct equity ownership. We find no robust evidence that large control wedge is associated with tunneling risk which indicates that banks perceive pyramidal structure as less risky control-enhancing mechanism. This finding also suggests that stricter regulations and more disclosure requirements reduce expropriation risk within Indonesian business groups.

Keywords: Ownership structure, Business groups, Pyramids, Cost of debt, Bank loans

JEL Classification: G21, G32, G34