Using a unique dataset of Korean firms’ consolidated and unconsolidated financial statements, we investigate the role of parent firms in pyramidal business groups. Our study reveals that parent firms’ holdings of equity stakes in affiliated firms are not just large but grow substantially each year. Parents’ equity-stake investment (i.e., an increase in equity stakes) contributes significantly to financing subsidiaries’ capital expenditures. The capital for parents' equity-stake investment comes primarily from equity issuance, but not from cash flow. Overall, compared to other firms, parents invest more in equity stakes than in physical assets and issue equity frequently. Within a given business group, these investment and financing patterns are more pronounced for firms situated high in the pyramidal chain and those with large holdings of equity stakes. Our findings provide evidence that parent firms prioritize their role as capital raisers and distributors, and their equity stakes are a linchpin in business groups’ internal capital markets. Our findings also suggest that business groups’ internal capital markets do not substitute for external finance but are buttressed by it.

JEL classification: D22, G31, G32, G34

Key words: parent firms, business group, internal capital market, equity stake, equity issuance, propping