Financially Interlinked Business Groups* |
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Authors: | Maitreesh Ghatak Raja Kali |
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Affiliation: | University of Chicago;Sam M. Walton College of Business University of Arkansas, Fayetteville, AR 72701. |
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Abstract: | Financial interlinkage, in the form of cross-holding of equity and debt between firms, characterizes 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. |
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