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The deep-pocket effect of internal capital markets

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  • Boutin, Xavier
  • Cestone, Giacinta
  • Fumagalli, Chiara
  • Pica, Giovanni
  • Serrano-Velarde, Nicolas

Abstract

We provide evidence that incumbent and entrant firms' access to business group deep pockets affects the entry patterns in product markets. Relying on a unique French data set on business groups, our paper shows that entry into 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 of group cash holdingson entry is more important in environments where financial constraints are pronounced. The cash holdings of incumbent and entrant groups also affect the survival rate of entrants in the three- to five-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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 109 (2013)
Issue (Month): 1 ()
Pages: 122-145

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Handle: RePEc:eee:jfinec:v:109:y:2013:i:1:p:122-145

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Web page: http://www.elsevier.com/locate/inca/505576

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Keywords: Business groups; Cash holdings; Internal capital markets; Entry;

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References

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Cited by:
  1. Sarah Guillou & Michel Bernini & Flora Bellone, 2013. "Firms leverage and export quality evidence from France," Sciences Po publications 2013-13, Sciences Po.
  2. repec:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p4sr364g4 is not listed on IDEAS
  3. Lorenzo Ciari & Riccardo De Bonis, 2011. "Entry decisions after deregulation: the role of incumbents' market power," Mo.Fi.R. Working Papers 50, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  4. Heitor Almeida & Murillo Campello & Igor Cunha & Michael S. Weisbach, 2013. "Corporate Liquidity Management: A Conceptual Framework and Survey," NBER Working Papers 19502, National Bureau of Economic Research, Inc.
  5. Michele Bernini & Sarah Guillou & Flora Bellone, 2013. "Firms leverage and export quality:evidence from France," Documents de Travail de l'OFCE 2013-13, Observatoire Francais des Conjonctures Economiques (OFCE).

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