Investment and dividend dynamics within business groups: evidence from Iran

Esmaeil Aliabadi, Ali Ebrahim Nejad and Mahdi Heidari

Journal of Economic Studies, 2024, vol. 52, issue 7, 1303-1320

Abstract: PurposeThe purpose of our study is to examine the functioning of internal capital markets (ICMs) within business groups in Iran. We document how the ultimate owner's economic interests in affiliated firms influence their investment and dividend policies.Design/methodology/approachUsing hand-collected data on the ownership structures of Iranian firms, we first identify group-affiliated firms using Almeida et al.’s (2011) method. Having identified business groups, we test a number of hypotheses concerning the dynamics of the ICMs and the implications of the ultimate owner’s incentives for affiliated firms’ behavior.FindingsWe first demonstrate that investments of group-affiliated firms are less sensitive to their own cash flow (as compared to stand-alone firms) but are sensitive to the cash flows of other firms affiliated with the same group near or at the bottom of the ownership structure. We next find significant variation in dividend policy within groups, with notably higher dividends for firms close to the ultimate owner. Furthermore, we find that higher investments by firms close to the owner lead to lower dividends by firms positioned far from the owner, but the reverse does not hold.Originality/valueWe are the first to examine the effect of group-affiliated firms’ investments on the dividend policies of other firms based on their position within the group. Our findings illuminate how business groups prioritize funding investments in their closely held firms over paying dividends to outside investors in firms positioned farther from the group owner.

Keywords: Business groups; Internal capital market; Investment-cash flow sensitivity; Dividend policy; Tunneling (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jespps:jes-02-2024-0099

DOI: 10.1108/JES-02-2024-0099

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