IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v59y2013i6p1326-1343.html
   My bibliography  Save this article

Capital Markets and Firm Organization: How Financial Development Shapes European Corporate Groups

Author

Listed:
  • Sharon Belenzon

    (Fuqua School of Business, Duke University, Durham, North Carolina 27708)

  • Tomer Berkovitz

    (Graduate School of Business, Columbia University, New York, New York 10027)

  • Luis A. Rios

    (Fuqua School of Business, Duke University, Durham, North Carolina 27708)

Abstract

We investigate the effect of financial development on the formation of European corporate groups. Because cross-country regressions are hard to interpret in a causal sense, we exploit exogenous industry measures to investigate a specific channel through which financial development may affect group affiliation: internal capital markets. Using a comprehensive firm-level data set on European corporate groups in 15 countries, we find that countries with less developed financial markets have a higher percentage of group affiliates in more capital-intensive industries. This relationship is more pronounced for young and small firms and for affiliates of large and diversified groups. Our findings are consistent with the view that internal capital markets may, under some conditions, be more efficient than prevailing external markets, and that this may drive group affiliation even in developed economies. This paper was accepted by Bruno Cassiman, business strategy.

Suggested Citation

  • Sharon Belenzon & Tomer Berkovitz & Luis A. Rios, 2013. "Capital Markets and Firm Organization: How Financial Development Shapes European Corporate Groups," Management Science, INFORMS, vol. 59(6), pages 1326-1343, June.
  • Handle: RePEc:inm:ormnsc:v:59:y:2013:i:6:p:1326-1343
    DOI: 10.1287/mnsc.1120.1655
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.1120.1655
    Download Restriction: no

    File URL: https://libkey.io/10.1287/mnsc.1120.1655?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Black, Bernard S. & Gilson, Ronald J., 1998. "Venture capital and the structure of capital markets: banks versus stock markets," Journal of Financial Economics, Elsevier, vol. 47(3), pages 243-277, March.
    2. Tarun Khanna & Jan W. Rivkin, 2001. "Estimating the performance effects of business groups in emerging markets," Strategic Management Journal, Wiley Blackwell, vol. 22(1), pages 45-74, January.
    3. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    4. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    5. Carlin, Wendy & Mayer, Colin, 2003. "Finance, investment, and growth," Journal of Financial Economics, Elsevier, vol. 69(1), pages 191-226, July.
    6. de Haas, Ralph & van Lelyveld, Iman, 2010. "Internal capital markets and lending by multinational bank subsidiaries," Journal of Financial Intermediation, Elsevier, vol. 19(1), pages 1-25, January.
    7. Gopalan, Radhakrishnan & Nanda, Vikram & Seru, Amit, 2007. "Affiliated firms and financial support: Evidence from Indian business groups," Journal of Financial Economics, Elsevier, vol. 86(3), pages 759-795, December.
    8. Stijn Claessens & Luc Laeven, 2003. "Financial Development, Property Rights, and Growth," Journal of Finance, American Finance Association, vol. 58(6), pages 2401-2436, December.
    9. Randall Morck, 2005. "How to Eliminate Pyramidal Business Groups: The Double Taxation of Intercorporate Dividends and Other Incisive Uses of Tax Policy," NBER Chapters, in: Tax Policy and the Economy, Volume 19, pages 135-179, National Bureau of Economic Research, Inc.
    10. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-586, June.
    11. Daniel A. Levinthal, 1991. "Organizational Adaptation and Environmental Selection-Interrelated Processes of Change," Organization Science, INFORMS, vol. 2(1), pages 140-145, February.
    12. Ritter, Jay R, 1984. "The "Hot Issue" Market of 1980," The Journal of Business, University of Chicago Press, vol. 57(2), pages 215-240, April.
    13. Nicola Cetorelli & Linda S. Goldberg, 2012. "Follow the Money: Quantifying Domestic Effects of Foreign Bank Shocks in the Great Recession," American Economic Review, American Economic Association, vol. 102(3), pages 213-218, May.
    14. Tarun Khanna & Krishna Palepu, 2000. "Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups," Journal of Finance, American Finance Association, vol. 55(2), pages 867-891, April.
    15. David E. Weinstein & Yishay Yafeh, 1998. "On the Costs of a Bank-Centered Financial System: Evidence from the Changing Main Bank Relations in Japan," Journal of Finance, American Finance Association, vol. 53(2), pages 635-672, April.
    16. Giovanni Dosi, 2000. "Innovation, Organization and Economic Dynamics," Books, Edward Elgar Publishing, number 1248.
    17. Granovetter, Mark, 1995. "Coase Revisited: Business Groups in the Modern Economy," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 4(1), pages 93-130.
    18. Nilsen, Jeffrey H, 2002. "Trade Credit and the Bank Lending Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 226-253, February.
    19. David S. Scharfstein & Jeremy C. Stein, 2000. "The Dark Side of Internal Capital Markets: Divisional Rent‐Seeking and Inefficient Investment," Journal of Finance, American Finance Association, vol. 55(6), pages 2537-2564, December.
    20. Rafael La Porta & Florencio Lopez‐De‐Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, April.
    21. Giacinta Cestone & Chiara Fumagalli, 2005. "The Strategic Impact of Resource Flexibility in Business Groups," RAND Journal of Economics, The RAND Corporation, vol. 36(1), pages 193-214, Spring.
    22. Marc Deloof, 1998. "Internal Capital Markets, Bank Borrowing, and Financing Constraints: Evidence from Belgian Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 25(7‐8), pages 945-968, September.
    23. Marc Deloof, 1998. "Internal Capital Markets, Bank Borrowing, and Financing Constraints: Evidence from Belgian Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 25(7&8), pages 945-968.
    24. Leff, Nathaniel H, 1978. "Industrial Organization and Entrepreneurship in the Developing Countries: The Economic Groups," Economic Development and Cultural Change, University of Chicago Press, vol. 26(4), pages 661-675, July.
    25. Bennet A. Zelner, 2009. "Using simulation to interpret results from logit, probit, and other nonlinear models," Strategic Management Journal, Wiley Blackwell, vol. 30(12), pages 1335-1348, December.
    26. Raymond Fisman & Inessa Love, 2003. "Trade Credit, Financial Intermediary Development, and Industry Growth," Journal of Finance, American Finance Association, vol. 58(1), pages 353-374, February.
    27. K. J. Martijn Cremers & Rocco Huang & Zacharias Sautner, 2011. "Internal Capital Markets and Corporate Politics in a Banking Group," Review of Financial Studies, Society for Financial Studies, vol. 24(2), pages 358-401.
    28. Giacinta Cestone & Chiara Fumagalli, 2005. "The Strategic Impact of Resource Flexibility in Business Groups," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 193-214, Winter.
    29. Robert H. Gertner & David S. Scharfstein & Jeremy C. Stein, 1994. "Internal versus External Capital Markets," NBER Working Papers 4776, National Bureau of Economic Research, Inc.
    30. Celikyurt, Ugur & Sevilir, Merih & Shivdasani, Anil, 2010. "Going public to acquire? The acquisition motive in IPOs," Journal of Financial Economics, Elsevier, vol. 96(3), pages 345-363, June.
    31. Robert H. Gertner & David S. Scharfstein & Jeremy C. Stein, 1994. "Internal versus External Capital Markets," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 1211-1230.
    32. Tarun Khanna & Yishay Yafeh, 2007. "Business Groups in Emerging Markets: Paragons or Parasites?," Journal of Economic Literature, American Economic Association, vol. 45(2), pages 331-372, June.
    33. Gompers, Paul A, 1995. "Optimal Investment, Monitoring, and the Staging of Venture Capital," Journal of Finance, American Finance Association, vol. 50(5), pages 1461-1489, December.
    34. Faccio, Mara & Lang, Larry H. P., 2002. "The ultimate ownership of Western European corporations," Journal of Financial Economics, Elsevier, vol. 65(3), pages 365-395, September.
    35. Heitor V. Almeida & Daniel Wolfenzon, 2006. "A Theory of Pyramidal Ownership and Family Business Groups," Journal of Finance, American Finance Association, vol. 61(6), pages 2637-2680, December.
    36. Perotti, Enrico C. & Gelfer, Stanislav, 2001. "Red barons or robber barons? Governance and investment in Russian financial-industrial groups," European Economic Review, Elsevier, vol. 45(9), pages 1601-1617, October.
    37. Wulf, Julie, 2009. "Influence and inefficiency in the internal capital market," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 305-321, October.
    38. Goto, Akira, 1982. "Business groups in a market economy," European Economic Review, Elsevier, vol. 19(1), pages 53-70.
    39. Tarun Khanna & Jan W. Rivkin, 2006. "Interorganizational Ties and Business Group Boundaries: Evidence from an Emerging Economy," Organization Science, INFORMS, vol. 17(3), pages 333-352, June.
    40. Tarun Khanna & Yishay Yafeh, 2005. "Business Groups and Risk Sharing around the World," The Journal of Business, University of Chicago Press, vol. 78(1), pages 301-340, January.
    41. Oliner, Stephen D & Rudebusch, Glenn D, 1992. "Sources of the Financing Hierarchy for Business Investment," The Review of Economics and Statistics, MIT Press, vol. 74(4), pages 643-654, November.
    42. Kester, W Carl, 1992. "Industrial Groups as Systems of Contractual Governance," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 8(3), pages 24-44, Autumn.
    43. Drew Dahl & Ronald Shrieves & Michael Spivey, 2002. "Financing Loan Growth at Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 22(3), pages 189-202, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. George, Rejie & Kabir, Rezaul, 2008. "Business groups and profit redistribution: A boon or bane for firms?," Journal of Business Research, Elsevier, vol. 61(9), pages 1004-1014, September.
    2. Luis Alfonso Dau & Randall Morck & Bernard Yin Yeung, 2021. "Business groups and the study of international business: A Coasean synthesis and extension," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 52(2), pages 161-211, March.
    3. Ly, Kim Cuong & Liu, Hong & Opong, Kwaku, 2017. "Who acquires whom among stand-alone commercial banks and bank holding company affiliates?," International Review of Financial Analysis, Elsevier, vol. 54(C), pages 144-158.
    4. Daphne W. Yiu & Yuan Lu & Garry D. Bruton & Robert E. Hoskisson, 2007. "Business Groups: An Integrated Model to Focus Future Research," Journal of Management Studies, Wiley Blackwell, vol. 44(8), pages 1551-1579, December.
    5. Tarun Khanna & Yishay Yafeh, 2007. "Business Groups in Emerging Markets: Paragons or Parasites?," Journal of Economic Literature, American Economic Association, vol. 45(2), pages 331-372, June.
    6. Khosa,Amrinder & Ahmed,Kamran & Henry,Darren, 2019. "Ownership Structure, Related Party Transactions, and Firm Valuation," Cambridge Books, Cambridge University Press, number 9781108492195.
    7. Bena, Jan & Ortiz-Molina, Hernán, 2013. "Pyramidal ownership and the creation of new firms," Journal of Financial Economics, Elsevier, vol. 108(3), pages 798-821.
    8. Hsiao, Ching-Yuan & Shiu, Yung-Ming, 2021. "Group firms’ access to internal capital markets: The contingent roles of group resources and affiliates’ financial weakness," Economic Modelling, Elsevier, vol. 96(C), pages 135-156.
    9. Sharon Belenzon & Ulya Tsolmon, 2016. "Market frictions and the competitive advantage of internal labor markets," Strategic Management Journal, Wiley Blackwell, vol. 37(7), pages 1280-1303, July.
    10. Randall Morck, 2011. "Finance and Governance in Developing Economies," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 375-406, December.
    11. Sharon Belenzon & Tomer Berkovitz, 2010. "Innovation in Business Groups," Management Science, INFORMS, vol. 56(3), pages 519-535, March.
    12. Domenico Scalera & Alberto Zazzaro, 2009. "Do Inter-Firm Networks Make Access to Finance Easier? Issues and Empirical Evidence," Mo.Fi.R. Working Papers 25, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    13. K. S. Manikandan & J. Ramachandran, 2015. "Beyond institutional voids: Business groups, incomplete markets, and organizational form," Strategic Management Journal, Wiley Blackwell, vol. 36(4), pages 598-617, April.
    14. Amess, Kevin & Banerji, Sanjay & Lampousis, Athanasios, 2015. "Corporate cash holdings: Causes and consequences," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 421-433.
    15. An Buysschaert & Marc Deloof & Marc Jegers & An Rommens, 2008. "Is Group Affiliation Profitable in Developed Countries? Belgian Evidence," Corporate Governance: An International Review, Wiley Blackwell, vol. 16(6), pages 504-518, November.
    16. Jürgen Wandel, 2011. "Business groups and competition in post-Soviet transition economies: The case of Russian “agroholdings”," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 24(4), pages 403-450, December.
    17. Saul Estrin & Svetlana Poukliakova & Daniel Shapiro, 2009. "The Performance Effects of Business Groups in Russia," Journal of Management Studies, Wiley Blackwell, vol. 46(3), pages 393-420, May.
    18. Choi, Young Rok & Yoshikawa, Toru & Zahra, Shaker A. & Han, Bong H., 2014. "Market-oriented institutional change and R&D investments: Do business groups enhance advantage?," Journal of World Business, Elsevier, vol. 49(4), pages 466-475.
    19. Bansal, Shashank & Singh, Harminder, 2023. "Does market competition foster related party transactions? Evidence from emerging market," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    20. Boutin, Xavier & Cestone, Giacinta & Fumagalli, Chiara & Pica, Giovanni & Serrano-Velarde, Nicolas, 2013. "The deep-pocket effect of internal capital markets," Journal of Financial Economics, Elsevier, vol. 109(1), pages 122-145.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:59:y:2013:i:6:p:1326-1343. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.