Business group affiliation, political connections and cost of debt: empirical evidence from an emerging market

We examine the impact of business group membership on the cost of debt of publicly listed companies in Bangladesh. We conjecture that due to the coinsurance effect group firms will be required to pay less on external debt capital compared to counter nongroup firms. Further, we explore the possible impact of political connection on the link between business group affiliation and cost of debt. Accordingly, we found that the cost of debt capital is significantly lower in business group firms over standalone firms which are in line with the notions of coinsurance contention. Next, we document that financing firms charge premium fees for firms with politicians on the board of business group firms compared to group firms without politicians on the board. To mitigate possible self-selection biasness and endogeneity concerns we employ propensity score matching and 2 step system GMM. Finally, we conclude that our study advances the importance of business group membership in debt market where group firms significantly influence the entire capital market from a developing market context.