Testing Financial Constraint against Expropriation Explanation: the Use of Intra-Group Financing in China

摘要

This paper studies intra-group financing in emerging market business groups using Chinese data. We focus on two aspects of the business group setting: a cross-financing to get over severe financing constraints that are often prevalent in emerging market economies, and the rampant expropriation of minority shareholders under the weak corporate governance environment. We document the existence and interaction of both, and discuss the implication of the efficiency as well as magnitude of intra-group financing in emerging market. We found that, from the perspective of the business group, the market is the most inefficient when weak corporate governance induces more tunneling activities and there is no pressing need for mitigating financing constraints. On the other hand, when the firms are well-governed and have a pressing need to use the internal capital market to mitigate financing constraints, the efficiency of the internal capital market is the highest.