Internal Capital Markets in Times of Crisis: The Benefit of Group Affiliation in Italy

Italy’s economic and banking systems have been under stress in the wake of the global financial crisis and the euro crisis. Our results suggest that firms in business groups have been more likely to survive in this challenging environment than unaffiliated firms. Better performance stems from access to an internal capital market, and the survival value of groups increases, inter alia, with group-wide cash flow. We show that actual internal capital transfers increase during the crisis, and these transfers move funds from cash-rich to cash-poor firms and also to those with more favourable investment opportunities. The ability to borrow externally provides the internal capital market with additional funds, but sharing external capital becomes less important during a crisis. Our overall results highlight the benefits of internal capital markets when external capital markets are tight or distressed.