Subsidiary debt, capital structure and internal capital markets

Adam C. Kolasinski

Journal of Financial Economics, 2009, vol. 94, issue 2, 327-343

Abstract: I study external debt issued by operating subsidiaries of diversified firms. Consistent with Kahn and Winton's [2004. Moral hazard and optimal subsidiary structure for financial institutions. Journal of Finance 59, 2537-2575] model, where subsidiary debt mitigates asset substitution, I find firms are more likely to use subsidiary debt when their divisions vary more in risk. Consistent with subsidiary debt mitigating the free cash flow problem, I find that subsidiaries are more likely to have their own external debt when they have fewer growth options and higher cash flow than the rest of the firm. Finally, I find that subsidiary debt mitigates the "corporate socialism" and "poaching" problems modeled in theories of internal capital markets.

Keywords: Capital; structure; Internal; capital; markets; Empirical; corporate; finance; Subsidiary; debt (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (34)

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