How Does Intragroup Financing Affect Leverage? Belgian Evidence

Abstract

We hypothesize that the lower costs of asymmetric information and financial distress and the potentially higher tax benefits associated with intragroup debt will cause firms with access to such funds to have higher leverage. The presence of intragroup debt could worsen the relations between the firm and nongroup creditors, resulting in lower nongroup debt levels. Intragroup guarantees could improve these relationships and thus lead to higher debt levels. We examine how the presence and the amount of intragroup debt are related to total leverage and nongroup leverage for 958 large nonfinancial Belgian firms. Belgian firms provide an interesting case for research on this relationship, as internal capital markets play an important role in their financing. We also analyze the relationship between the presence of intragroup guarantees and the leverage of these firms. Our empirical analysis confirms the hypotheses.