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Financially Interlinked Business Groups

Maitreesh Ghatak () and Raja Kali

No 2002-5, CEI Working Paper Series from Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University

Abstract: Financial interlinkage, in the form of cross-holding of equity and debt between firms, characterize business groups in many countries. We suggest that such financial interlinkage can be viewed as a way to solve credit rationing caused by asymmetric information. If firms possess better information about each other than a bank, then business groups can be a mechanism to induce firms to sort on the basis of this information. Banks can offer a menu of contracts that vary in the extent of financial interlinkage to induce firms to self-select on the basis of the equilibrium composition of the business groups they can form.

Keywords: business groups; cross-holding of debt and equity; financial interlinkage (search for similar items in EconPapers)
JEL-codes: G30 L14 D82 O16 (search for similar items in EconPapers)
Date: 2002-09
Note: May 24, 2001
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