Do group affiliated firms specialize in debt? Evidence from Pakistan

• Published in: Journal of economic and administrative sciences 2016-05, Vol.32 (1), p.46-62
• Main Authors: Qamar Uz Zaman Malik, Afza, Talat
• Format: Article
• Language: English
• Subjects: Asset acquisitions; Bankruptcy; Capital markets; Capital structure; Cluster analysis; Conflicts of interest; Current liabilities; Debt financing; Emerging markets; Literature reviews; Researchers; Specialization; Stockholders
• ISSN: 1026-4116; 2054-6246
• DOI: 10.1108/JEAS-07-2015-0020

Purpose – The purpose of this paper is to examine the debt structure of group affiliated firms in Pakistan for the period of 2009-2011. The study seeks to know the level of debt specialization in group affiliated firms. If they do; then how are they different from stand-alone firms? Design/methodology/approach – The study primarily uses Herfindahl-Hirschman Index and Excl90 as measures of debt specialization, which are further used in cluster, threshold and conditional analysis. Corporate groups are characterized to subsidize their affiliates through internal debt market and loan guarantee. Logistic regression model is used to analyze association among the measures of debt specialization and firm-specific characteristics for group affiliated and stand-alone firms. Findings – The results show that about 85 percent firms use more than 50 percent of debt from one debt type. However, group affiliated firms are more inclined toward debt specialization than stand-alone firms. Tangibility and book leverage are negatively and significantly associated to the measures of debt specialization. Moreover, internal debt market and loan guarantee are suggestive reasons of debt specialization in group affiliated firms. Practical implications – This study highlights the issue of group affiliation and its significance on firm’s debt structure. It has implications for determination of the optimal financing strategy. In the context of emerging economies, group affiliated firms can create market imperfections as a protection shield. In case of emerging markets, it is recommended to strengthen regulatory mechanism to avoid such market imperfections. Originality/value – Prior studies have explored the phenomenon of debt specialization for rated and unrated firms. However, firm group affiliation is widely studied in the context of capital structure. This is a pioneer study to establish and analyze a link between firm group affiliation and debt specialization.