Group Affiliation and Ownership Concentration as Determinants of Capital Structure Decisions: Contextualizing the Facts for an Emerging Economy

Abstract

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This study considers the firm s affiliation with business groups and the ownership structure as a special set of determinants in the capital structure puzzle of Chilean firms. The major findings show that group-affiliated firms take advantage of internal capital markets and transactions with related parties (e.g. low transference price or loans at competitive interest rates) which reduces the demand for external debt. Majority shareholders in affiliated firms behave as controllers of managers, on the one hand, and avoid the supervisory role of debt, on the other hand. In stand-alone firms, supervision led by majority shareholders is complemented by the monitoring role of debt through higher levels of leverage. The results also confirm some of the expected relations according to the main theories. For instance, the findings support the view that creditors are reluctant to finance companies with potentially high agency problems because of the existence of growth opportunities. Firm size and collateral impact positively on debt level, whilst profitability has the opposite effect according to the pecking order approach. We conclude that further developments in capital structure theories adjusted to the particularities of the different institutional contexts are needed.