Speaker: Giorgo Sertsios is an Assistant Professor of Finance at Universidad de los Andes. More »
Abstract: We study a sample of business groups composed of two firms in unrelated industries in the period 2009-2013. Some of these groups split up during this time, leaving firms as standalone. We instrument for the stand-alone status using shocks to the industry of the other firm in the group. We find that firms becoming standalone reduce their leverage and investment. This evidence is consistent with the idea that affiliation to a group eases credit constraints. The effects are more pronounced when the other firm has high tangibility, which is consistent with cross-pledging, and when the firm operates in a debt-dependent industry or in a country with low domestic credit. In line with “socialism” in business groups, firms more affected by becoming standalone are those with previous poor performance and high leverage relative to their industry peers, and firms with low Tobin’s Q relative to the other firm in the group. We do not find a significant effect of becoming standalone on performance.
Last Updated: Aug 30, 2016