Internal Capital Markets in Russian Business Groups: Evidence from Corporate Investments

Cover Page

Cite item

Full Text

Abstract

Although business groups occupy strong positions in Russia, existing studies on Russian group-affiliated companies are insufficient yet to provide a thorough understanding of how the internal capital markets of business groups operate and influence corporate activities. The purpose of this paper is to assess the impact of the internal capital markets on the investments of Russian group-affiliated companies.

What motivates the use of internal capital markets? Does the reallocation of intragroup funds help mitigate financing constraints of group members and facilitate their investments? To find relevant answers we apply the generalized method of moments (GMM) to estimate investments models based on data for 514 Russian companies affiliated with 48 business groups over the period from 2014 to 2018. Following the existing studies based on both Q model of investment and the Euler equation model, we analyze the relationship between subsidiaries’ investments and such factors as lagged investments, sales, leverage, asset profitability and liquidity as well as the size of both subsidiaries and their groups.

The results reveal that leverage and profitability of business groups positively influence the investment activity of subsidiaries. These findings support our hypotheses that the internal capital markets of Russian business groups are active and help mitigate the financial constraints of affiliated companies. Meanwhile, we find that subsidiaries’ investment activity is negatively related to their asset profitability which is typical for tunneling or propping practices followed by controlling shareholders. The results also show some evidence of the positive relationship between subsidiaries’ cash flows and investments, demonstrating that the internal capital markets in Russia do not eliminate the financial constraints of group-affiliated companies. The findings on the internal capital markets of Russian business groups described in this paper may be useful for managers seeking for mechanisms to increase the financial resource availability for large and medium companies in the context of sanctions, macroeconomic instability and yet not sufficiently developed financial markets in Russia.

About the authors

Y. Korotkova

Author for correspondence.
Email: yikorotkova@econ.msu.ru

References

  1. Almeida H., Campello M. Financial Constraints, Asset Tangibility, and Corporate Investment. The Review of Financial Studies. 2007;20(5):1429-1460. doi: 10.1093/rfs/hhm019.
  2. Almeida H., Kim C.-S., Kim H. B. Internal Capital Markets in Business Groups: Evidence from the Asian Financial Crisis. The Journal of Finance. 2015;70(6):2539-2586. doi: 10.1111/jofi.12309.
  3. Ang A., Masulis R., Pham P. K., Zein J. Internal Capital Markets in Family Business Groups During the Global Financial Crisis. UNSW Business School Research Paper Forthcoming. 2018. 55 p. doi: 10.2139/ssrn.2517810.
  4. Avdasheva S., Golikova V., Dolgopyatova T., Yakovlev A. Large new companies (‘business groups’) in the Russian transition economy: State of the problem in the economic literature. WP1/2005/09. Moscow: Higher School of Economics Publ.; 2005. 52 p. (In Russ.).
  5. Avdasheva S. Russian Holding Groups: New Empirical Evidence. Problems of Economic Transition. 2007;50(5):24-43. doi: 10.2753/PET1061-1991500502.
  6. Belenzon S., Berkovitz T., Rios L. A. Capital Markets and Firm Organization: How Financial Development Shapes European Corporate Groups. Management Science. 2013;59(6):1326-1343. doi: 10.1287/mnsc.1120.1655.
  7. Bena J., Ortiz-Molina H. Pyramidal ownership and the creation of new firms. Journal of Financial Economics. 2013;108:798-821. doi: 10.1016/j.jfineco.2013.01.009.
  8. Beyer B., Downes J., Rapley E. T. Internal capital market inefficiencies, shareholder payout, and abnormal leverage. Journal of Corporate Finance. 2017;43:39-57. doi: 10.1016/j.jcorpfin.2016.12.009.
  9. Brodskiy D. Investment strategy of a holding company. Candidate of Economic Sciences dissertation autoabstract. Moscow: Lomonosov Moscow State University; 2010. 29 p.
  10. Buchuk D., Larrain B., Muñoz F., Urzúa F. I. The internal capital markets of business groups: Evidence from intra-group loans. Journal of Financial Economics. 2014;112:190-212. doi: 10.1016/j.jfineco.2014.01.003.
  11. Byun H., Choi S., Hwang L., Kim R. G. Business group affiliation, ownership structure, and the cost of debt. Journal of Corporate Finance. 2013;23:311-331. doi: 10.1016/j.jcorpfin.2013.09.003.
  12. Chandera Y., Utama C. A., Husodo Z. A., Setia-Atmaja L. The co-insurance effect hypothesis and the cost of bank loans: Evidence from Indonesian pyramidal business groups. Global Finance Journal. 2018;37:100-122. doi: 10.1016/j.gfj.2018.03.003.
  13. Cherkasova V. The influence of financial constraint factors on investment activity of companies in developed and emerging capital markets. Economic Analysis: Theory and Practice. 2014;13(34):17-27 (In Russ.).
  14. Cherkasova V., Teplova O. Research on the influence of financial constraints on investment decisions of companies in emerging capital markets. Journal of Corporate Finance Research. 2013;7(2):4-21 (In Russ.). doi: 10.17323/j.jcfr.2073-0438.7.2.2013.
  15. Cleary S. The Relationship between Firm Investment and Financial Status. The Journal of Finance. 1999;54(2):673-692. doi: 10.1111/0022-1082.00121.
  16. Deloof M. Internal capital markets, bank borrowing, and financing constraints: evidence from Belgian firms. Journal of Business Finance & Accounting. 1998;25(7&8):945-968. doi: 10.1111/1468-5957.00220.
  17. Dementiev V. Russian financial and industrial groups: network-type integration experience. Management and Business Administration. 2007;1:116-130 (In Russ.).
  18. Dewaelheyns N., Van Hulle C. Internal Capital Markets and Capital Structure: Bank Versus Internal Debt. European Financial Management. 2010;16(3):345-373. doi: 10.1111/j.1468-036X.2008.00457.x.
  19. Djankov S., La Porta R., Lopez-de-Silanes F., Shleifer A. The law and economics of self-dealing. Journal of Financial Economics. 2008;88:430-465. doi: 10.1016/j.jfineco.2007.02.007.
  20. Fazzari S. M., Hubbard R. G., Petersen B. C., Blinder A. S., Poterba J. M. Financing Constraints and Corporate Investment. Brookings Papers on Economic Activity. 1988;1988:141-206. doi: 10.2307/2534426.
  21. Ferrando A., Marchica M.-T., Mura R. Financial Flexibility and Investment Ability Across the Euro Area and the UK. European Financial Management. 2017;23(1):87-126. doi: 10.1111/eufm.12091.
  22. Friedman E., Johnson S., Mitton J. Propping and tunneling. Journal of Comparative Economics. 2003;31:732-750. doi: 10.1016/j.jce.2003.08.004.
  23. Gautier A., Hamadi M. Internal Capital Market Efficiency of Belgian Holding Companies. Presses universitaires de Grenoble. 2005;26(2):11-34.
  24. George R., Kabir R., Qian J. Investment–cash flow sensitivity and financing constraints: New evidence from Indian business group firms. Journal of Multinational Financial Management. 2011;21:69-88. doi: 10.1016/j.mulfin.2010.12.003.
  25. Gopalan R., Nanda V., Seru A. Affiliated firms and financial support: Evidence from Indian business groups. Journal of Financial Economics. 2007;86:759-795. doi: 10.1016/j.jfineco.2006.09.008.
  26. Gugler K., Peev E., Segalla E. The internal workings of internal capital markets: Cross-country evidence. Journal of Corporate Finance. 2013;20:59-73. doi: 10.1016/j.jcorpfin.2012.12.001.
  27. Jiang G., Lee C. M. C., Yue H. Tunneling through intercorporate loans: The China experience. Journal of Financial Economics. 2010;98:1-20. doi: 10.1016/j.jfineco.2010.05.002.
  28. Johnson S., La Porta R., Lopez-de-Silanes F., Shleifer A. Tunneling. American Economic Review Papers and Proceedings. 2000;90:22-27. doi: 10.1257/aer.90.2.22.
  29. Hoshi T., Kashyap A., Scharfstein D. Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups. The Quarterly Journal of Economics. 1991;106(1):33-60. doi: 10.2307/2937905.
  30. Kaplan S. N., Zingales L. Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints? The Quarterly Journal of Economics. 1997;112(1):169-215. doi: 10.1162/003355397555163.
  31. Khanna T., Palepu K. The Future of Business Groups in Emerging Markets: Long-Run Evidence from Chile. The Academy of Management Journal. 2000;43(3):268-285. doi: 10.2307/1556395.
  32. Korotkova Y. I. Internal capital market efficiency of business groups. Problems of Management Theory and Practice. 2019;7:100-115 (In Russ.).
  33. Kulemin A. N. Approaches to strategic financial management in a holding company. The Bulletin of Moscow University. Series 6. Economics. 2007;6:25-39 (In Russ.).
  34. Kumar S., Ranjani K. S. Financial constraints and investment decisions of listed Indian manufacturing firms. Financial Innovation. 2018;4(6):1-17. doi: 10.1186/s40854-018-0090-4.
  35. Laeven L. Does Financial Liberalization Reduce Financing Constraints? Financial Management. 2003;32(1):5-34. doi: 10.2307/3666202.
  36. Lensink R., van der Molen R., Gangopadhyay S. Business groups, financing constraints and investment: the case of India. The Journal of Development Studies. 2003;40(2):93-119. doi: 10.1080/00220380412331293787.
  37. Mota J. H., dos Santos M. C. Does Internal Capital Market Membership Matter for Capital Allocation? Theory and Evidence from the Euro Area. CICEE Working Paper No.003/2019. 2019. 53 p. doi: 10.2139/ssrn.3530191.
  38. Peng W. Q., Wei K. C. J., Yang Z. Tunneling or propping: Evidence from connected transactions in China. Journal of Corporate Finance. 2011;17:306-325. doi: 10.1016/j.jcorpfin.2010.08.002.
  39. Perotti E. C., Gelfer S. Red barons or robber barons? Governance and Investment in Russian Financial-Industrial Groups. European Economic Review. 2001;45:1601-1617. doi: 10.1016/S0014-2921(00)00097-0.
  40. Russian Economy in 2018. Trends and Outlooks. Moscow: Gaidar Institute Publ.; 2019. 616 p.
  41. Shin H.-H., Stulz R. M. Are Internal Capital Markets Efficient? The Quarterly Journal of Economics. 1998;113(2):531-552. doi: 10.1162/003355398555676.
  42. Shleifer A., Vishny R. A survey of corporate governance. Journal of Finance. 1997;52:737-783. doi: 10.1111/j.1540-6261.1997.tb04820.x.
  43. Shumilov A., Volchkova N. Russian business groups: substitutes for missing institutions? Working Papers w0050. Moscow: New Economic School (NES); 2004. 16 p.
  44. Zhiganov A. V., Yudanov A. Y. High-Growth Companies in Russia: The Influence of Affiliation on Growth Factors. Russian Management Journal. 2019;17(3):287-308 (In Russ.). doi: 10.21638/spbu18.2019.301.

Supplementary files

Supplementary Files
Action
1. JATS XML
Download

Copyright (c) 2020 Korotkova Y.

Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.