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Financially Interlinked Business Groups

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  • Maitreesh Ghatak
  • Raja Kali

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.

Suggested Citation

  • Maitreesh Ghatak & Raja Kali, 2001. "Financially Interlinked Business Groups," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(4), pages 591-619, December.
    • Handle: RePEc:bla:jemstr:v:10:y:2001:i:4:p:591-619
    DOI: 10.1111/j.1430-9134.2001.00591.x
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    References listed on IDEAS

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    1. Ghatak, Maitreesh, 2000. "Screening by the Company You Keep: Joint Liability Lending and the Peer Selection Effect," Economic Journal, Royal Economic Society, vol. 110(465), pages 601-631, July.
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    More about this item

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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