Internal Capital Market and Dividend Policies: Evidence From Business Groups

Radhakrishnan Gopalan, Vikram Nanda and Amit Seru

The Review of Financial Studies, 2014, vol. 27, issue 4, 1102-1142

Abstract: We argue that internal capital market imperatives of business groups i.e., reallocation of capital across group firms, influences an affiliated firm's dividend policy. Intuition is developed in a model in which business group insiders distribute dividends from cash-rich firms and use their share of payout to invest in other affiliated firms. Employing multi-country panel-data, we find support for this channel: Dividends by a group firm are positively related with equity-financed investments by its affiliated firms. Results are corroborated by exploiting variation in a firm's investment opportunity generated by changes in import tariff policy: a shock to investment opportunity of an affiliated firm is propagated to dividend policies of other firms in its group.

Date: 2014
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