Capital Structure and Business Groups: Evidence from Pakistan

Aamir Inam Bhutta,Tahir Suleman

doi:10.20547/jms.2014.1704207

Aamir Inam Bhutta, Tahir Suleman

Open Access

https://doi.org/10.20547/jms.2014.1704207

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Abstract

The purpose of this study is not only to test the effects of group affiliation on capital structure decisions of Pakistani firms but also to compare the determinants of capital structure of group's affiliated firms with those of independent firms. This study also investigates the differences in the financial decision of both group affiliates and independent firms during the period of the energy crisis.Using the 2-step GMM method, this study finds that business group affiliated firms use relatively more debt financing as compared to independent firms in Pakistan. Overall, this study verifies the existence of standard determinants as suggested by capital structure theories. However, practical differences exist regarding the determinants (e.g., firm size, firm growth, firm profitability and firm tangibility) between both group's affiliated firms and independent firms specially. Moreover, larger and more profitable groups are using more debt financing, while the highly leveraged and diversified groups have a limited access to debt financing.The findings also suggest a high level of accessibility to the debt financing for the group affiliates as compared to independent firms without a significant shift in the firm level determinants of capital structure during the energy crisis. It is the group's overall risk that appears to be an important attribute for the external finance providers during the energy crisis.

Highlights

A business group is owned and controlled by a single family (Almeida & Wolfenzon, 2006) through pyramidal structure and voting rights (Gohar, 2013)
This study contributes to the growing literature on business group affiliation and the firm’s capital structure decisions using data for 268 firms from Pakistan for the period 2003-2012
The ten year sample allows to test the impact of group affiliation on capital structure decisions, and, helps to analyze the behavior of both group affiliated firms and independent firms during the energy crisis

Summary

Introduction

A business group is owned and controlled by a single family (Almeida & Wolfenzon, 2006) through pyramidal structure and voting rights (Gohar, 2013). Emerging markets are normally characterized by weak financial markets and institutions, which make it hard for the firms to raise capital. This is one of the reasons to merge into the business groups in emerging countries (Khanna, 2000). A separate legal entity for each affiliate makes the business groups different from conglomerates. These affiliates can have direct access the external capital market, and have an ability to raise funds through the internal capital market (Dewaelheyns & Van Hulle, 2010)

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