Title
Internal capital markets and capital structure: bank versus internal debt Internal capital markets and capital structure: bank versus internal debt
Author
Faculty/Department
Faculty of Applied Economics
Publication type
article
Publication
Oxford ,
Subject
Economics
Source (journal)
European financial management. - Oxford
Volume/pages
16(2010) :3 , p. 345-373
ISSN
1354-7798
ISI
000277974400002
Carrier
E
Target language
English (eng)
Full text (Publishers DOI)
Abstract
We argue that domestic business groups are able to actively optimise the internal/external debt mix across their subsidiaries. Novel to the literature, we use bi-level data (i.e. data from both individual subsidiary financial statements and consolidated group level financial statements) to model the bank and internal debt concentration of non-financial Belgian private business group affiliates. As a benchmark, we construct a size and industry matched sample of non-group affiliated (stand-alone) companies. We find support for a pecking order of internal debt over bank debt at the subsidiary level which leads to a substantially lower bank debt concentration for group affiliates as compared to stand-alone companies. The internal debt concentration of a subsidiary is mainly driven by the characteristics of the group's internal capital market. The larger its available resources, the more intra-group debt is used while bank debt financing at the subsidiary level decreases. However, as the group's overall debt level mounts, groups increasingly locate bank borrowing in subsidiaries with low costs of external financing (i.e. large subsidiaries with important collateral assets) to limit moral hazard and dissipative costs. Overall, our results are consistent with the existence of a complex group wide optimisation process of financing costs.
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