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Security design and capital structure of business groups

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  • Messa, Alexandre

Abstract

This paper investigates the optimal contract between a principal and an agent that manages a business group and diverts funds among its projects. The optimal contract can be implemented by limited liability financial securities and results in a capital structure that provides risk sharing among the group firms. The paper provides explanations for the cross-holding of equity between firms in business groups, the contagion between the asset prices of such firms, and shows that a tax on intercorporate dividends may render the organization of such groups infeasible and lead to the creation of conglomerates.

Suggested Citation

  • Messa, Alexandre, 2015. "Security design and capital structure of business groups," The Quarterly Review of Economics and Finance, Elsevier, vol. 58(C), pages 163-179.
    • Handle: RePEc:eee:quaeco:v:58:y:2015:i:c:p:163-179
    DOI: 10.1016/j.qref.2015.03.005
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    More about this item

    Keywords

    Business groups; Corporate governance; Capital structure;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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