Working Paper: CEPR ID: DP2204
Authors: Enrico C. Perotti; Stanislav Gelfer
Abstract: We study the governance role of Russian Financial-Industrial Groups (FIG) and their impact on financing of investment. We compare member firms of a group with a control set of large firms categorized by dispersed ownership and/or management and employee control. We find that investment is sensitive to internal finance for the second set of firms but not for the first; in fact, we find that cash flow is negatively correlated with investment in the FIG group firms. This is consistent with extensive reallocation of resources within the groups. One interpretation is that groups have an internal capital market that redirects finance to firms with better investment opportunities. We test this view against the alternative possibility that financial reallocation hide opportunistic value transfer across firms. Specifically, we assess the quality of the investment process in group and non-group firms by regressing individual firms’ investments on our measure of Tobin’s Q. The result supports the notion that group firms allocate capital better than independent firms, although it does not rule out the possibility of private appropriation of value. We then distinguish between bank-led groups, which are more hierarchical and industry-centred groups that may be more defensive arrangements. Investment is not significantly correlated with cash flow in industry-led group firms (unlike in independent firms), while the negative correlation is entirely due to bank-led group firms, suggesting a more extensive financial reallocation and the use of profitable firms as cash-cows. Intriguingly, the greater sensitivity of group firms’ investment to Q is entirely to be attributed to firms in bank-led groups, where the controlling bank may have a stronger profit motive and authority to reallocate resources.
Keywords: conglomerate groups; credit constraints; emerging markets; corporate governance
JEL Codes: E58; G21; P50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cash flow (E50) | investment in FIG firms (G24) |
| internal capital market (G19) | resource reallocation in FIGs (F20) |
| cash flow (E50) | investment in independent firms (G24) |
| cash flow (E50) | investment in bank-led groups (O16) |
| Tobin's Q (G19) | investment in bank-led groups (O16) |
| bank-led groups (G21) | better capital allocation (G31) |
| hierarchical structure of FIGs (L22) | efficient investment profiles (G11) |
| bank-led groups (G21) | sensitivity of investment to market assessments (G31) |