Ownership structure and debt allocation within pyramidal business groups

Purpose This paper examines the relationship between a pyramidal firm’s control-ownership wedge and the amount of its debt relative to the group’s total debt and its likelihood of having guaranteed debt in its capital structure. Design/methodology/approach The study sample consists of the 200 largest Indonesian companies listed on the Indonesia Stock Exchange for the period 2015–2022. I run baseline regressions and a number of robustness tests, which include two-stage least squares, censored regressions, difference-in-differences and subsample regressions as well as regressions with interaction terms. Findings The results show that, within pyramidal business groups, member firms with large control-ownership wedges are associated with less group debt allocation and a higher probability of having guaranteed debt. Originality/value To the best of my knowledge, this paper is the first to examine the direct link between a pyramidal firm’s control wedge and its’ proportion of group debt allocation and probability of having guaranteed debt. Therefore, it enriches the theory of tradeoffs within business groups and sheds more insights on the intragroup guarantees literature.