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We study whether Russian Financial-Industrial Groups facilitate access by Russian firms to investment finance. We compare firms which are members of official Financial Industrial Groups and/or are owned by a large Russian bank with a control set of large firms categorized by dispersed ownership or/and management and employee control. We find that investment is sensitive to internal finance for the second set of firms but not for the first. This is consistent with extensive reallocation of resources within the groups to overcome capital constraints. One interpretation is that group firms have an internal capital market which facilitate access to finance. We test this view against the alternative ossibility that financial reallocation hide opportunistic value transfer across firms. Specifically, we assess the quality of the investment process in group and non group firms by regressing individual firms' absolute and relative investment on our measure of Tobin's Q. The result supports the notion that group firm allocate capital better than independent firms. We then distinguish between bank-led groups, which are more hierarchical, and industry-centered groups which may be more defensive arrangements. While investment is not significantly correlated with cash flow in industry-led group firms (unlike in independent firms), there is a negative significant correlation for bank-led firms, suggesting a more extensive financial reallocation and the use of profitable firms as cash-cows. Most intriguingly, the greater sensitivity of group firms' investment to Q is entirely attributed to firms in bank-led groups, where the controlling bank may have a stronger profit motive and authority to reallocate resources.

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Еnrico Perotti

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Stanislav Gelfer

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