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The literature on capital structure dynamics assumes that companies trade-off the advantages of a leverage adjustment and its costs. In general, private companies are assumed to face relatively large adjustment costs, and should have lower financing flexibility. However, we argue that an important class of private companies � business group affiliates � may face relatively low adjustment costs because of their access to both internal and external capital markets and the beneficial reputation effects of belonging to a group. Our empirical results show significant differences in the composition of the capital structure and the leverage adjustment process between affiliates of private Belgian business groups and comparable stand-alone companies. Group affiliates have higher levels of leverage, and adjust their capital structure more frequently than stand-alones. Our evidence suggests that the flexibility in group companies� capital structure is not solely driven by the use of internal leverage: group affiliates more frequently adjust their external leverage as well, unless the group is in poor financial health, in which case the affiliates� probability of attracting external leverage is severely reduced.
