Business Group Affiliation, Ownership Structure, and the Cost of Debt

This paper examines the relation between business group affiliation and the cost of debt capital. The co-insurance effect associated with business groups can reduce the cost of debt, while expropriation by controlling shareholders can raise the cost of debt. We find that firms affiliated with major Korean business groups (i.e., chaebols) enjoy a substantially lower cost of public debt than do independent firms, consistent with the co-insurance argument. We also examine several factors that influence the relation between group affiliation and the cost of debt, including a firm's uncertainty about the future payoffs of debtholders, pledgeable income, group-level resources, and position in the group structure. The results are all consistent with the co-insurance explanation. Our study highlights that the role of business groups in the debt market is distinct from the role of ownership structure