Group Affiliation and Ownership Concentration as Determinants of Capital Structure Decisions: Contextualizing the Facts for an Emerging Economy

ABSTRACT

This study considers the firm’s affiliation with business groups and the ownership structure as determinants of leverage decisions in Chilean firms. The major findings show that group-affiliated firms take advantage of internal capital markets and transactions with related parties (e.g., low transference price or loans at competitive interest rates) that reduces the demand for external debt. Majority shareholders in affiliated firms behave as controllers of managers, on the one hand, and avoid the supervisory role of debt, on the other hand. In stand-alone firms, supervision led by majority shareholders is complemented by the monitoring role of debt through higher levels of leverage. We conclude that further developments in capital structure theories adjusted to the particularities of the different institutional contexts are needed.

KEY WORDS:

• business groups
• capital structure
• Chilean firms
• ownership concentration
• panel data

JEL CLASSIFICATION:

• G32

Acknowledgments

We wish to thank Ali M. Kutan (editor), three anonymous referees, and seminar participants in the 16^th FRAP Finance, Risk and Accounting Perspectives Conference celebrated in 2017 at University of Cambridge, UK, for their valuable comments and suggestions.

Supplemental Data

Supplemental data for this article can be access on the publisher’s website.

Notes

1. http://www.svs.cl/sitio/mercados/grupos.php (accessed in January 2017).

2. As a matter of fact, this definition does not differ substantially from Cuervo-Cazurra (2006), or Mazumdar (2012), who narrowed the concept to a set of legally-separate firms with stable relationships operating in multiple, strategically unrelated activities and under common ownership and control.

3. The market capitalization has averaged 117% of the GDP between 2009 and 2014. Also, the relative weight of the banking industry in the economy is about 70% measured as the credit by deposit money banks as a share of the GDP over the same period (Beck, Demirgüç-Kunt, and Levine 2000). Chile’s financial depth, measured as the sum of the bank deposits, private mortgages, domestic public debt, corporate bonds and market capitalization as a share of the GDP, increased from 46% in 1981 to 276% in 2011 (WEF 2009, 2012).

4. Since the privatization process during the 70s and 80s, only a few private agents could take part in it, triggering the subsequent concentration of firms’ ownership structures and the formation of business groups in the hands of influential families (Buchuk et al. 2014; Silva, Majluf, and Paredes 2006). Consequently, the main agency problem in Chilean firms is between majority and minority shareholders rather than between shareholders and executives.

5. The Law No. 18046 of Public Companies states that cross-holdings among firms are forbidden. This restriction makes the pyramidal structures relatively simple and straightforward to understand.

6. According to Capital Markets Law No. 18045 (Title XV, pp. 39–44), a firm belongs to a business group if any of the follow conditions hold: (i) the firm has the same controller as other firms, and the controller holds at least 25% of direct ownership; (ii) a significant portion of the firm’s assets are allocated to business groups; or (iii) the firm is controlled by one or more firms that belong to a business group controlled by an ultimate shareholder.

7. To address properly the agency problems discussed in this study, we excluded from the leverage measures the net amount of debt with related parties (which is the case for affiliated firms).

8. The original Thomson Eikon’s definition includes government ownership. However, we checked one by one the entirely ownership structure of each firm-year, and we can assert that government do not participate into the ownership structure of our sample.

9. We thank an anonymous referee for suggesting us these additional arguments.