Subsidiary debt, capital structure and internal capital markets Academic Article

abstract

• I study external debt issued by operating subsidiaries of diversified firms. Consistent with Kahn and Winton's [2004. Moral hazard and optimal subsidiary structure for financial institutions. Journal of Finance 59, 2537-2575] model, where subsidiary debt mitigates asset substitution, I find firms are more likely to use subsidiary debt when their divisions vary more in risk. Consistent with subsidiary debt mitigating the free cash flow problem, I find that subsidiaries are more likely to have their own external debt when they have fewer growth options and higher cash flow than the rest of the firm. Finally, I find that subsidiary debt mitigates the "corporate socialism" and "poaching" problems modeled in theories of internal capital markets. 2009 Elsevier B.V. All rights reserved.

authors

• Kolasinski, Adam

published proceedings

• Journal of Financial Economics

author list (cited authors)

• Kolasinski, A. C.

citation count

• 39

complete list of authors

• Kolasinski, Adam C

publication date

• November 2009

publisher

• Elsevier  Publisher

published in

• Journal of Financial Economics  Journal

keywords

• Capital Structure
• Empirical Corporate Finance
• Internal Capital Markets
• Subsidiary Debt

Digital Object Identifier (DOI)

• 10.1016/j.jfineco.2008.12.005

start page

• 327

end page

• 343

volume

• 94

issue

• 2

URL

• http://dx.doi.org/10.1016/j.jfineco.2008.12.005