Security design and capital structure of business groups

Alexandre Messa ()

The Quarterly Review of Economics and Finance, 2015, vol. 58, issue C, 163-179

Abstract: This paper investigates the optimal contract between a principal and an agent that manages a business group and diverts funds among its projects. The optimal contract can be implemented by limited liability financial securities and results in a capital structure that provides risk sharing among the group firms. The paper provides explanations for the cross-holding of equity between firms in business groups, the contagion between the asset prices of such firms, and shows that a tax on intercorporate dividends may render the organization of such groups infeasible and lead to the creation of conglomerates.

Keywords: Business groups; Corporate governance; Capital structure (search for similar items in EconPapers)
JEL-codes: D82 G30 G32 L20 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:58:y:2015:i:c:p:163-179

DOI: 10.1016/j.qref.2015.03.005

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