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The Deep-Pocket Effect of Internal Capital Markets

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Author Info

  • Xavier Boutin

    (European Commission)

  • Giacinta Cestone

    (Cass Business School, CSEF, and ECGI)

  • Chiara Fumagalli

    (Università Bocconi)

  • Giovanni Pica

    (Università di Salerno, CSEF and Centro Luca d\'Agliano)

  • Nicolas Serrano-Velarde

    (Said Business School, Centre for Business Taxation, Oxford University)

Abstract

We provide evidence that incumbent and entrant firms\' access to business group deep pockets affects entry patterns in product markets. Relying on a unique French data set on business groups, our paper shows that entry in 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 on entry of group cash holdings is more important in environments where financial constraints are pronounced and in more financially dependent sectors. The cash holdings of incumbent and entrant groups also affect the survival rate of entrants in the 3 to 5 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

Paper provided by Centro Studi Luca d\'Agliano, University of Milano in its series Development Working Papers with number 341.

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Length: 65
Date of creation: 13 Nov 2012
Date of revision: 13 Nov 2012
Handle: RePEc:csl:devewp:341

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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. 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).
  2. 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.
  3. Sarah Guillou & Michel Bernini & Flora Bellone, 2013. "Firms leverage and export quality evidence from France," Sciences Po publications 2013-13, Sciences Po.

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