Economics, Econometrics and Finance
4 years ago

Financial interlinkage in business groups solves credit rationing, boosts economic growth.

Journal of Economics & Management Strategy
Financially Interlinked Business Groups
Maitreesh Ghatak, Raja Kali

Paper Summary

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Financially interlinked business groups help companies overcome credit rationing due to information imbalances. By holding equity and debt in each other, firms can self-select based on their knowledge of one another, which banks can leverage to offer tailored financial contracts. This mechanism allows firms to form business groups based on their shared information, improving access to credit.