Red Barons or Robber Barons? Governance and Financing in Russian Financial-Industrial Groups

Red Barons or Robber Barons? Governance and Financing in Russian Financial-Industrial Groups

University of Amsterdam; Centre for Economic Policy Research (CEPR)
Credit Suisse First Boston - General

We study the governance role of Russian Financial-Industrial Groups (FIG) and their impact on financing of investment. We compare member firms of a group with a control set of large firms categorized by dispersed ownership or/and management and employee control. We find that investment is sensitive to internal finance for the second set of firms but not for the first; in fact, we find that cash flow is negatively correlated with investment in the FIG group firms. This is consistent with extensive reallocation of resources within the groups. One interpretation is that groups have an internal capital market which redirects finance to firms with better investment opportunities. We test this view against the alternative possibility that financial reallocation hide opportunistic value transfer across firms. Specifically, we assess the quality of the investment process in group and non group firms by regressing individual firms' investment on our measure of Tobin's Q. The result supports the notion that group firm allocate capital better than independent firms, although it does not rule out the possibility of private appropriation of value.

We then distinguish between bank-led groups, which are more hierarchical, and industry-centered groups which may be more defensive arrangements. Investment is not significantly correlated with cash flow in industry-led group firms (unlike in independent firms), while the negative correlation is entirely due to bank-led group firms, suggesting a more extensive financial reallocation and the use of profitable firms as cash-cows. Intriguingly, also the greater sensitivity of group firms' investment to Q is entirely to be attributed to firms in bank-led groups, where the controlling bank may have a stronger profit motive and authority to reallocate resources.

JEL Classifications: E58, G21, P50

Working Paper Series

Abstract has been viewed 1041 times

Go to Download Document Button to download paper from the SSRN Electronic Paper Collection

Contact Information for ENRICO C. PEROTTI (Contact Author) (Email address for ENRICO C. PEROTTI )
University of Amsterdam
Roetersstraat 18
Finance Group
Amsterdam 1018 WB
+31 20 525 4159 (Phone)
+31 20 525 5285 (Fax)

(No e-mail address available for ENRICO C. PEROTTI )
Centre for Economic Policy Research (CEPR)
90-98 Goswell Road
London EC1V 7RR
United Kingdom

Contact Information for STANISLAW GELFER

(No e-mail address available for STANISLAW GELFER )
Credit Suisse First Boston - General
11 Madison Avenue
New York , NY 10010
United States

Suggested Citation
Perotti, Enrico C. and Gelfer, Stanislaw, "Red Barons or Robber Barons? Governance and Financing in Russian Financial-Industrial Groups" (July 1999).

SSRN Electronic Paper Collection

If you are experiencing download difficulties, click here

If you cannot download or receive this paper through email, please contact Support@SSRN.Com.

Format Type

Number of


File Size

Est. download time
@ 28.8K

File name

Acrobat File


Dec 07, 1999


0.57 minutes


Adobe Acrobat Reader v4.05 or Adobe Acrobat 4.0.5 or greater is required to view this paper. To obtain your free copy, click on the Acrobat button

Download times are estimates only. Your time to download may be extended due to a poor connection or heavy internet traffic between your location and our servers.

SSRN Resources
To search for other abstracts in the SSRN archival database, click here.

To order a membership to an SSRN Network or to subscribe to one or more of SSRN's journals, go to our online subscription request form.

To go to SSRN's main web site (, click here.

Copyright © 2003 Social Science Electronic Publishing, Inc. All Rights Reserved