INTERNAL CAPITAL MARKETS, FORMS OF INTRAGROUP TRANSFERS, AND DIVIDEND POLICY: EVIDENCE FROM INDIAN CORPORATES

Abstract

AbstractFirms in a business group share ownership structures, allowing them access to sources of intragroup financing not available to independent firms. Resources could be transferred within a group either through intragroup transactions, primarily operational activities (internal transfers), or through dividends permitting insiders to make investments in other group firms (external transfers). The first strategy predicts lower dividends, and the second predicts the reverse. Using a large data set of listed Indian firms, we look at the costs of internal transfers versus external transfers and find that dividend policies of group firms are better explained by the external transfer hypothesis.