City Research Online

The deep-pocket effect of internal capital markets

Boutin, X., Cestone, G., Fumagalli, C. , Pica, G. & Serrano-Velarde, N. (2013). The deep-pocket effect of internal capital markets. Journal of Financial Economics, 109(1), pp. 122-145. doi: 10.1016/j.jfineco.2013.02.003


We provide evidence that incumbent and entrant firms' access to business group deep pockets affects entry patterns in product markets. Relying on a unique French data set on business groups, our paper shows that entry in manufacturing industries is negatively related to the cash hoarded by incumbent-affiliated groups, and positively related to entrant groups' cash. In line with theoretical predictions, we find that the impact on entry of group cash holdings is more important in environments where financial constraints are pronounced and in more financially dependent sectors. The cash holdings of incumbent and entrant groups also affect the survival rate of entrants in the 3 to 5 year post-entry window. Overall, our findings suggest that internal capital markets operate within corporate groups and affect the product market behavior of affiliated firms by mitigating financial constraints.

Publication Type: Article
Publisher Keywords: Social Sciences, Business, Finance, Economics, Business & Economics, Business groups, Cash holdings, Internal capital markets, Entry, BUSINESS GROUPS, INEFFICIENT INVESTMENT, INDUSTRIAL GROUPS, EMERGING MARKETS, FIRM, EXIT, ENTRY, OWNERSHIP, CONSTRAINTS, COMPETITION
Subjects: H Social Sciences > HG Finance
Departments: Bayes Business School > Finance
SWORD Depositor:
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