Working Paper: NBER ID: w29035
Authors: Asli M. Colpan; Randall Morck
Abstract: Business groups often contain banks or near banks that can protect group firms from economic shocks. A group bank subordinate to other group firms can become an “organ bank” that selflessly bails out distressed group firms and anticipates a government bailout. A group bank subordinating other group firms can extend loans to suppress their risk-taking to default risk, preserving risk-averse low-productivity zombie firms. Actual business groups can fall between these polar cases. Subordinated group banks magnify risk-taking; subordinating banks suppress risk-taking; yet both distortions promote business group firms’ survival. Limiting intragroup income and risk shifting, severing banks from business groups, or dismantling business groups may mitigate both distortions; but also limits business groups’ internal markets, thought important where external markets work poorly.
Keywords: business groups; banking; zombie firms; moral hazard; adverse selection
JEL Codes: F65; G01; G21; G23; N2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| business groups with banks (G21) | buffer idiosyncratic shocks (E32) |
| group banks providing loans to distressed firms (G21) | maintain solvency (G33) |
| agency vests in group bank (G24) | prioritize bank's survival (G21) |
| prioritize bank's survival (G21) | moral hazard problems (D82) |
| subordinated group banks (G21) | become 'organ banks' (G21) |
| 'organ banks' (G21) | lend to other firms (G21) |
| 'organ banks' (G21) | absorb losses (G33) |
| presence of group bank (G21) | emergence of 'zombie firms' (G33) |
| group bank's willingness to extend credit (G21) | distortion in market dynamics (D43) |
| adverse selection problem (D82) | prevent displacement of more efficient firms (L19) |
| presence of group banks (G21) | distort risk-taking behaviors among firms (G41) |