The Effect of Intra-group Loans on the Cash Flow Sensitivity of Cash: Evidence from Chile

We examine the effects of internal capital markets on the propensity of firms to save cash from cash flows. We argue that firms that are providers of funds to related parties must maintain a higher cash flow sensitivity of cash to prevent high levels of pressure on their cash holdings in contrast to receivers of intra-holding funds. Based on a sample of Chilean firms, we confirm that firms with high levels of loans to related companies have higher cash flow sensitivities of cash. This relationship is strongest for firms affiliated with business groups and financially constrained firms. We do not find conclusive evidence of loss to the minority shareholders (tunneling) from intra-group loans. © 2019 International Review of Finance Ltd. 2019

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