Economic policy uncertainty and debt allocation within business groups

A business group operation, as a strategic organizational form, is critical for corporate development. However, how business groups allocate their debt between parent and subsidiary companies remains an unexplored issue. This study explores the impact of economic policy uncertainty (EPU) on debt allocation within business groups. In theory, when business groups encounter high EPU, they can choose either a centralized or a decentralized debt structure. We find that Chinese business groups under EPU tend to choose centralized borrowing, especially for non-state-owned enterprises and business groups with low-quality internal controls and volatile profitability. Our findings highlight the significance of EPU in determining the allocation of decision rights within business groups.