The Capital Structure of Groups and Group Affiliated Firms

This paper compares the capital structure of groups and group-affiliated firms vs.that of stand-alone firms by utilizing a sample of Swedish firms for the years 1997-1999. The characteristics which are peculiar to groups and group affiliated firms, especially their access to internal capital markets, imply differing agency and information costs relative to stand-alone firms as well as differences in their ability to reduce taxes. They also imply differing bankruptcy costs associated with such firms compared to stand-alone firms. Since agency, information and bankruptcy costs as well as firms' ability to utilize the debt tax shields affect the choice of capital structure, it follows that one should observe differences in the way groups (and group affiliated firms) choose their capital structure relative to stand-alone firms. This paper therefore empirically addresses three questions. Is the capital structure of groups (as a whole) different from that of stand-alone firms? Is the determination of the capital structure of group-affiliated firms different from that of stand-alone firms? And finally, what is the effect of intra-group borrowing on group-affiliated firms' level of external debt? The contention is that groups and group-affiliated firm capital structure decisions are affected differently by the factors generally considered by capitals structure studies and that the existence of high levels of intra-group debt would imply lower levels of outside debt, either because the internal markets substitute for external debt or because high levels of intra-group debt implies lower transparency and higher complexity, making it difficult for debt providers to judge the motives of borrowing firms. I find evidence of all of the above in the analysis.