What Determines Intragroup Debt Financing? Spanish Evidence

Abstract

In this paper, we examine the determinants of internal or intragroup debt financing and its relationship with other debt funding alternatives, especially external debt. We perform a panel data analysis with a sample of 787 non-financial Spanish companies actively financing their operations with intragroup debt during the six-year period between 2013 and 2018. Our results show that intragroup debt positively depends on size and asset’s tangibility, but it is negatively related to profitability, age, and growth. We also find that greater intragroup debt funding substitutes a reduction in external debt of as much as a quarter. Furthermore, we identify a hierarchy of preferences in the selection of different financing pathways, with intragroup debt much supporting the pecking order theory than external debt.

Keywords

• Business groups
• Capital structure
• Internal capital markets
• Intragroup debt financing
• Pecking order theory