The role of parent firms in business groups’ internal capital markets

Abstract

AbstractUsing a unique dataset of unconsolidated financial statements, we investigate the investment and financing policies of parent firms in South Korea's business groups over the period 2003–2016. Parent firms add to their equity‐stake holdings substantially each year to support affiliated firms’ capital expenditures. Parent firms finance their equity‐stake investment primarily with external funds. These tendencies are more pronounced if parents sit high in the pyramidal chain or are central to controlling other group firms and if parents belong to large business groups. Overall, parent firms prioritize their role as capital raisers and distributors for affiliated firms, and business groups’ internal capital markets are supported by external finance.