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Market Structure, Internal Capital Markets, and the Boundaries of the Firm

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Author Info
RICHMOND D. MATHEWS
DAVID T. ROBINSON

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Abstract

We study how the creation of an internal capital market (ICM) can invite strategic responses in product markets that, in turn, shape firm boundaries. ICMs provide ex post resource flexibility, but come with ex ante commitment costs. Alternatively, stand-alones possess commitment ability but lack flexibility. By creating flexibility, integration can sometimes deter a rival's entry, but commitment problems can also invite predatory capital raising. These forces drive different organizational equilibria depending on the integrator's relation to the product market. Hybrid organizational forms like strategic alliances can sometimes dominate integration by offering some of its benefits with fewer strategic costs. Copyright (c) 2008 The American Finance Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2008.01395.x
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Publisher Info
Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 63 (2008)
Issue (Month): 6 (December)
Pages: 2703-2736
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Handle: RePEc:bla:jfinan:v:63:y:2008:i:6:p:2703-2736

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  1. Boutin, Xavier & Cestone, Giacinta & Fumagalli, Chiara & Pica, Giovanni & Serrano-Velarde, Nicolas, 2009. "The Deep Pocket Effect of Internal Capital Markets," CEPR Discussion Papers 7184, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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