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Financially Interlinked Business Groups*
Author(s) -
Ghatak Maitreesh,
Kali Raja
Publication year - 2001
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1430-9134.2001.00591.x
Subject(s) - business , equity (law) , information asymmetry , debt , monetary economics , credit rationing , finance , economics , financial system , interest rate , political science , law
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.