Propping in the Pyramidal Business Groups in Turkey

Abstract

This article investigates the existence of propping 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 business 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 market funds and a substitute for incomplete financial markets. Propping provides an implicit insurance against bankruptcy risk.