Propping in the Pyramidal Business Groups in Turkey

Published date01 April 2018
DOIhttp://doi.org/10.1002/jcaf.22329
Date01 April 2018
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© 2018 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.22329
Propping in the Pyramidal
Business Groups in Turkey
Meltem Gurunlu
INTRODUCTION
The pyramidal
ownership (or ver-
tically integrated
diversified business
groups) is a preva-
lent form of indirect
ownership in many
emerging market
countries including
Turkey. The pyrami-
dal ownership serves
as a control concen-
trating mechanism in
which the controlling
shareholder typically
obtains more control
rights than cash flow
rights by means of
building the owner-
ship in vertical layers
and usually under
a holding company.
A seminal article by
Friedman, Johnson,
and Mitton (2003) claims that
in emerging markets with such
pyramidal ownership structure,
there is a great deal of tunnel-
ing by the entrepreneurs who
control publicly traded firms.
But, under some conditions
entrepreneurs may also prop
up their firms, that is, they may
issue debt using their collater-
als and support affiliated firms
in the group. They provided
evidences which explain this
propping phenomenon and
why emerging markets with
such ownership structures
grow rapidly and
why they are also
subject to frequent
economic and finan-
cial crises. Distinc-
tively, the pyramidal
group companies
have access both to
external and internal
capital markets and
hence have more pos-
sibilities for leading
to more efficient allo-
cation of funds than
stand-alone firms.
What distinguishes
this study from the
other research is
that it explores the
debt and dividend
policies as channels
for propping within
business groups in
an emerging market,
Turkish stock mar-
ket. More specifi-
cally, it intends to examine the
effects of pyramidal ownership
on the capital structure and
dividend payout decisions of
150 companies listed on Istan-
bul Stock Exchange—over the
years 2010–2016—using 1,050
firm-year data in total and
This article investigates the existence of prop-
ping in Turkish business group firms for the years
2010–2016 (150 firms and 1,050 firm-year data
in total). It is claimed that pyramidal ownership in
Turkey is used to prop up intra-group funds and
is a beneficial vehicle providing a less costly way
of financing. The empirical results of the research
indicate the existence of propping in the Turkish
business groups and bring a debt and dividends
(debt service hypothesis) related explanation for
the propping phenomenon in the pyramidal busi-
ness groups. Accordingly, the key findings indicate
that firms within the business group transfer funds
to each other via debt and dividends channels in
order to reduce financial distress. Hence, business
groups in Turkey use pyramidal ownership as a
financing vehicle to increase internal capital mar-
ket funds and a substitute for incomplete financial
markets. Propping provides an implicit insurance
against bankruptcy risk. © 2018 Wiley Periodicals, Inc.
Refereed (Double-Blind
Peer Reviewed)

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