Roles of ownership structure and investment opportunities in directing internal capital allocation within groups

By employing regression analyses on matched samples formed by propensity score matching to investigate the factors driving internal capital allocation decisions, this study reveals a negative relationship between net capital inflows via related-party borrowing and sales, implying that resources within groups are circulated rather than allocated in a unidirectional way. After controlling for net capital inflows via related-party sales (borrowing) and other covariates within each year and industry, we find that the negative relationship between profitability and net capital inflows via related-party borrowing is concentrated among the firms in which controlling shareholders have large ownership and a high level of corporate control in terms of voting rights and board control. These findings suggest that the linkage between controlling shareholders’ private benefits and firms and controlling shareholders’ influence on managerial decisions drives the coinsurance or cross-subsidization function of internal capital markets within groups.