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How Do Internal Capital Markets Work? Evidence from the Great Recession
[Synthetic control methods for comparative case studies: estimating the effect of California’s tobacco control program]

Author

Listed:
  • David Buchuk
  • Borja Larrain
  • Mounu Prem
  • Francisco Urzúa Infante

Abstract

We study the inner workings of internal capital markets during the 2008–09 recession using a unique dataset of loans between business group firms in an emerging market. Intragroup loans increase quickly during the recession. Firms that are more central in the ownership network simultaneously increase lending and borrowing. Acting like simple intermediaries, central firms do not increase net lending. Our results imply that formal control rights are essential for intermediation in internal capital markets, particularly during distress. In line with previous results on winner-picking, receivers of intragroup loans are high-Q, financially constrained firms, which also perform significantly better than providers during the recession.

Suggested Citation

  • David Buchuk & Borja Larrain & Mounu Prem & Francisco Urzúa Infante, 2020. "How Do Internal Capital Markets Work? Evidence from the Great Recession [Synthetic control methods for comparative case studies: estimating the effect of California’s tobacco control program]," Review of Finance, European Finance Association, vol. 24(4), pages 847-889.
    • Handle: RePEc:oup:revfin:v:24:y:2020:i:4:p:847-889.
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    File URL: http://hdl.handle.net/10.1093/rof/rfz022
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    Citations

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    Cited by:

    1. Ducret, Romain, 2021. "Investors' perception of business group membership during an economic crisis : Evidence from the COVID-19 pandemic," FSES Working Papers 524, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
    2. Huneeus, Federico & Larrain, Borja & Larrain, Mauricio & Prem, Mounu, 2021. "The internal labor markets of business groups," Journal of Corporate Finance, Elsevier, vol. 69(C).
    3. Kong, Dongmin & Ji, Mianmian & Liu, Lihua, 2023. "Mandatory dividend policy and investment efficiency within state-owned business groups," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    4. Chu, Pyung Kun, 2022. "Semibeta asset pricing in the Korean stock market," Finance Research Letters, Elsevier, vol. 50(C).
    5. Ducret, Romain & Isakov, Dušan, 2020. "The Korea discount and chaebols," Pacific-Basin Finance Journal, Elsevier, vol. 63(C).
    6. Maria Aluchna & Tomasz Kuszewski, 2021. "Pyramidal Ownership and Company Value: Evidence from Polish Listed Companies," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 15(4), December.
    7. Mauricio Jara‐Bertín & Cristian Pinto‐Gutiérrez & Carlos Pombo, 2021. "The effect of intra‐group loans on the cash flow sensitivity of cash: Evidence from Chile," International Review of Finance, International Review of Finance Ltd., vol. 21(2), pages 374-403, June.
    8. Liu, Lihua & Shu, Haicheng, 2022. "Mandatory dividend policy and perk consumption: Evidence from state-owned business groups in China," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 77(C).
    9. Kabbach-de-Castro, Luiz Ricardo & Kirch, Guilherme & Matta, Rafael, 2022. "Do internal capital markets in business groups mitigate firms' financial constraints?," Journal of Banking & Finance, Elsevier, vol. 143(C).

    More about this item

    Keywords

    Business groups; Centrality; Control rights; Great recession; Internal capital markets;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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