Abstract
This paper compares the capital structure of groups and group-affiliated firms to that of stand-alone firms by utilizing a sample of Swedish firms for the years 1997-1999. The characteristics that are peculiar to groups and group-affiliated firms, especially their access to internal capital markets, imply different agency and information costs relative to stand-alone firms. In addition, groups have tools to reduce taxes not available to stand-alone firms. Since agency and information costs as well as firms’ ability to utilize the debt tax shields affect the choice of capital structure, it follows that one should observe differences in the way groups (and group-affiliated firms) choose their capital structure relative to stand-alone firms. This paper therefore empirically addresses three questions. Is the leverage of groups (as a whole) different from that of stand-alone firms? Is the determination of the leverage of group-affiliated firms different from that of stand-alone firms? And finally, what is the effect of intra-group borrowing on group-affiliated firms’ level of external debt? The contention is that the group form of organization significantly affects the capital structure choices of firms. Due to the presence of countervailing forces it is not possible ex ante to predict the sign of the difference in leverage levels between groups and stand-alone firms. In addition, I expect to find differences in the way the leverage of group-affiliated firms (which is also influenced by group-wide factors) is determined compared to stand-alone firms. In particular, I expect a number of firm level factors to be less important in determining the leverage of group-affiliated firms. Finally, it is expected that the existence of high levels of intra-group debt leads to lower levels of external debt, either because the internal markets substitute for external debt or because high levels of intra-group debt imply lower transparency and higher complexity, making it difficult for debt providers to judge the motives of the borrowing firms. I find evidence of all of the above in the analysis.