How do business group firms utilize internal capital markets?

Purpose – The purpose of this study is to provide evidence for how business group firms transfer financial resources among affiliated firms by examining the differences in the level of debt financing and the choices of new equity financing between group affiliated and nonaffiliated firms in an emerging market, Turkey. The role of affiliated banks for internal capital market transactions is also to be examined. Design/methodology/approach – Univarite analysis and simple pooled OLS regression analysis are performed to examine the role of group affiliation on the level of several debt financing measures. Additionally, a Logit regression analysis is used to analyze the behavior of affiliated firms in their equity financing decisions by issuing new shares. Findings – Group affiliated firms transfer funds in the group by using transactions such as trade debt, and issuing cash rights and bonus shares. The affiliated firms – especially with a bank in the group – support their higher growth with new equity issues in the forms of cash rights and bonus shares along with higher trade debt. Moreover, nonaffiliated firms utilize a higher percentage of debt to shareholders, while affiliated firms without a bank utilize a higher financial debt. These findings are consistent with the idea that the role of the group bank is very important in financing choices of affiliated firms. Research limitations/implications – This paper provides direct measures of external and internal funds by focusing on new equity issues and debt structure, which can be applied in different economic environments, rather than using indirect measures or not readily available datasets such as connected party transactions. Originality/value – The paper provides additional evidence to assess the efficiency of the use of internal capital markets. Moreover, the role of group affiliated banks among affiliated firms has not yet been extensively addressed in the literature and an examination of this issue leads to a better understanding of their roles in diversified business groups.