Propping in the Pyramidal Business Groups in Turkey

• Published date: 01 April 2018
• Author: Meltem Gurunlu
• DOI: http://doi.org/10.1002/jcaf.22329
• Date: 01 April 2018

f

e

a

t

u

r

e

a

r

t

i

c

l

e

114

© 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)