Red Barons or Robber Barons? Governance and Financing in Russian FIG

Stanislav Gelfer and Enrico Perotti

No 2204, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the governance role of Russian Financial-Industrial Groups (FIG) and their impact on financing of investment. We compare member firms of a group with a control set of large firms categorized by dispersed ownership or/and management and employee control. We find that investment is sensitive to internal finance for the second set of firms but not for the first; in fact, we find that cash flow is negatively correlated with investment in the FIG group firms. This is consistent with extensive reallocation of resources within the groups. One interpretation is that groups have an internal capital market which redirects finance to firms with better investment opportunities. We test this view against the alternative possibility that financial reallocation hide opportunistic value transfer across firms. Specifically, we assess the quality of the investment process in group and non group firms by regressing individual firms' investment on our measure of Tobin's Q. The result supports the notion that group firm allocate capital better than independent firms, although it does not rule out the possibility of private appropriation of value. We then distinguish between bank-led groups, which are more hierarchical, and industry-centered groups which may be more defensive arrangements. Investment is not significantly correlated with cash flow in industry-led group firms (unlike in independent firms), while the negative correlation is entirely due to bank-led group firms, suggesting a more extensive financial reallocation and the use of profitable firms as cash-cows. Intriguingly, also the greater sensitivity of group firms' investment to Q is entirely to be attributed to firms in bank-led groups, where the controlling bank may have a stronger profit motive and authority to reallocate resources.

Keywords: conglomerate groups; Corporate Governance; Credit Constraints; Emerging Markets; RU (search for similar items in EconPapers)
JEL-codes: E58 G21 P50 (search for similar items in EconPapers)
Date: 1999-08
References: Add references at CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2204 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:2204

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=2204

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().