Advanced Search
MyIDEAS: Login to save this paper or follow this series

The Deep-Pocket Effect of Internal Capital Markets

Contents:

Author Info

  • Xavier Boutin

    (CREST(LEI) and European Commission (DG Competition - Chief Economist Team)

  • Giacinta Cestone

    ()
    (Queen Mary University of London, CSEF, CEPR and ECGI)

  • Chiara Fumagalli

    ()
    (Università Bocconi, CSEF and CEPR)

  • Giovanni Pica

    ()
    (Università di Salerno and CSEF)

  • Nicolas Serrano-Velarde

    (European University Institute, Florence)

Abstract

We provide evidence suggesting that incumbents’ access to group deep pockets has a negative impact on entry in product markets. Relying on a unique French data set on business groups, our paper presents three major findings. First, the amount of cash holdings owned by incumbent-affiliated groups is negatively related to entry in a market. Second, the impact on entry of group deep pockets is more important in markets where access to external funding is likely to be more difficult. Third, the ‘entry deterring effeect’ of group deep pockets is more pronounced when groups have more active internal capital markets. Our findings suggest that internal capital markets operate within corporate groups and that they have a potential anti-competitive effect.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.csef.it/WP/wp217.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 217.

as in new window
Length:
Date of creation: 10 Mar 2009
Date of revision: 30 Jun 2012
Publication status: Published with the title 'The Deep-Pocket Eff ect of Internal Capital Markets', The Journal of Financial Economics, 109(1), 122-145, 2013.
Handle: RePEc:sef:csefwp:217

Contact details of provider:
Postal: I-80126 Napoli
Phone: +39 081 - 675372
Fax: +39 081 - 675372
Email:
Web page: http://www.csef.it/
More information through EDIRC

Related research

Keywords: Business Groups; Internal Capital Markets; Deep-Pockets; Market Entry;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Weinstein, D.E. & Yafeh, Y., 1993. "Japan's Corporate Groups: Collusive or Competitive? An Empirical Investigation of Keiretsu Behavior," Harvard Institute of Economic Research Working Papers 1623, Harvard - Institute of Economic Research.
  2. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 1998. "Corporate Ownership Around the World," Harvard Institute of Economic Research Working Papers 1840, Harvard - Institute of Economic Research.
  3. Matías Braun & Borja Larrain, 2005. "Finance and the Business Cycle: International, Inter-Industry Evidence," Journal of Finance, American Finance Association, vol. 60(3), pages 1097-1128, 06.
  4. Marianne Bertrand & Paras Mehta & Sendhil Mullainathan, 2002. "Ferreting Out Tunneling: An Application To Indian Business Groups," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 121-148, February.
  5. Luigi Zingales, 1998. "Survival of the Fittest or the Fattest? Exit and Financing in the Trucking Industry," Journal of Finance, American Finance Association, vol. 53(3), pages 905-938, 06.
  6. Richmond D. Mathews & David T. Robinson, 2008. "Market Structure, Internal Capital Markets, and the Boundaries of the Firm," Journal of Finance, American Finance Association, vol. 63(6), pages 2703-2736, December.
  7. Marianne Bertrand & Antoinette Schoar & David Thesmar, 2007. "Banking Deregulation and Industry Structure: Evidence from the French Banking Reforms of 1985," Journal of Finance, American Finance Association, vol. 62(2), pages 597-628, 04.
  8. R. Glenn Hubbard, 1997. "Capital-Market Imperfections and Investment," NBER Working Papers 5996, National Bureau of Economic Research, Inc.
  9. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-86, June.
  10. Khanna, Naveen & Tice, Sheri, 2000. "Strategic Responses of Incumbents to New Entry: The Effect of Ownership Structure, Capital Structure, and Focus," Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 749-79.
  11. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Corporate structure, liquidity, and investment: evidence from Japanese industrial groups," Finance and Economics Discussion Series 82, Board of Governors of the Federal Reserve System (U.S.).
  12. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  13. Kovenock, D. & Phillips, G.M., 1995. "Capital Structure and Product Market Behavior: An Examination of Plant Exit and Investment Decisions," UFAE and IAE Working Papers 313.95, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  14. Duchin, Ran & Ozbas, Oguzhan & Sensoy, Berk A., 2010. "Costly external finance, corporate investment, and the subprime mortgage credit crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 418-435, September.
  15. Vojislav Maksimovic & Gordon Phillips, 2006. "The Industry Life Cycle and Acquisitions and Investment: Does Firm Organization Matter?," NBER Working Papers 12297, National Bureau of Economic Research, Inc.
  16. Kovenock, Dan & Phillips, Gordon, 1995. "Capital Structure and Product-Market Rivalry: How Do We Reconcile Theory and Evidence?," American Economic Review, American Economic Association, vol. 85(2), pages 403-08, May.
  17. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-97, November.
  18. Aghion, Philippe & Fally, Thibault & Scarpetta, Stefano, 2007. "Credit Constraints as a Barrier to the Entry and Post-Entry Growth of Firms," IZA Discussion Papers 3237, Institute for the Study of Labor (IZA).
  19. Nina Pavcnik, 2000. "Trade Liberalization, Exit, and Productivity Improvements: Evidence from Chilean Plants," NBER Working Papers 7852, National Bureau of Economic Research, Inc.
  20. Raghuram Rajan & Henri Servaes & Luigi Zingales, 1998. "The Cost of Diversity: The Diversification Discount and Inefficient Investment," NBER Working Papers 6368, National Bureau of Economic Research, Inc.
  21. Hall, Bronwyn H., 2009. "The financing of innovative firms," EIB Papers 8/2009, European Investment Bank, Economics Department.
  22. Murillo Campello, 2002. "Internal Capital Markets in Financial Conglomerates: Evidence from Small Bank Responses to Monetary Policy," Journal of Finance, American Finance Association, vol. 57(6), pages 2773-2805, December.
  23. Julian Franks & Colin Mayer & Stefano Rossi, 2003. "Ownership: Evolution and Regulation," OFRC Working Papers Series 2003fe14, Oxford Financial Research Centre.
  24. 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.
  25. Jeremy C. Stein, 1995. "Internal Capital Markets and the Competition for Corporate Resources," NBER Working Papers 5101, National Bureau of Economic Research, Inc.
  26. Matsusaka, John G. & Nanda, Vikram, 2002. "Internal Capital Markets and Corporate Refocusing," Journal of Financial Intermediation, Elsevier, vol. 11(2), pages 176-211, April.
  27. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September.
  28. Owen Lamont, 1996. "Cash Flow and Investment: Evidence from Internal Capital Markets," NBER Working Papers 5499, National Bureau of Economic Research, Inc.
  29. Antoine Faure- Grimaud & Roman Inderst, 2005. "Conglomerate Entrenchment under Optimal Financial Contracting," American Economic Review, American Economic Association, vol. 95(3), pages 850-861, June.
  30. Hyun-Han Shin & René M. Stulz, 1998. "Are Internal Capital Markets Efficient?," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 531-552, May.
  31. Stein, Jeremy C., 2003. "Agency, information and corporate investment," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 2, pages 111-165 Elsevier.
  32. Gerard Hoberg & Gordon M. Phillips, 2011. "Conglomerate Industry Choice and Product Di fferentiation," NBER Working Papers 17221, National Bureau of Economic Research, Inc.
  33. Marianne Bertrand & Sendhil Mullainathan, 2001. "Are Ceos Rewarded For Luck? The Ones Without Principals Are," The Quarterly Journal of Economics, MIT Press, vol. 116(3), pages 901-932, August.
  34. 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.
  35. Cleary, Sean & Povel, Paul & Raith, Michael, 2007. "The U-Shaped Investment Curve: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(01), pages 1-39, March.
  36. Chevalier, Judith A, 1995. "Capital Structure and Product-Market Competition: Empirical Evidence from the Supermarket Industry," American Economic Review, American Economic Association, vol. 85(3), pages 415-35, June.
  37. Sharon Belenzon & Tomer Berkovitz, 2007. "Innovation in Business Groups," Economics Series Working Papers 368, University of Oxford, Department of Economics.
  38. 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.
  39. Houston, Joel & James, Christopher & Marcus, David, 1997. "Capital market frictions and the role of internal capital markets in banking," Journal of Financial Economics, Elsevier, vol. 46(2), pages 135-164, November.
  40. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
  41. Murillo Campello & John Graham & Campbell R. Harvey, 2009. "The Real Effects of Financial Constraints: Evidence from a Financial Crisis," NBER Working Papers 15552, National Bureau of Economic Research, Inc.
  42. Vassilis Hajivassiliou & Frédérique Savignac, 2007. "Financing constraints and a firm's decision and ability to innovate: establishing direct and reverse effects," LSE Research Online Documents on Economics 4774, London School of Economics and Political Science, LSE Library.
  43. Klapper, Leora & Laeven, Luc & Rajan, Raghuram, 2006. "Entry regulation as a barrier to entrepreneurship," Journal of Financial Economics, Elsevier, vol. 82(3), pages 591-629, December.
  44. Robert Z. Lawrence, 1991. "Efficient or Exclusionist: The Import Behavior of Japanese Corporate Groups," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(1), pages 311-341.
  45. Jean-Pierre Benoit, 1984. "Financially Constrained Entry in a Game with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 490-499, Winter.
  46. 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.
  47. Heitor Almeida & Murillo Campello, 2006. "Financial Constraints, Asset Tangibility, and Corporate Investment," NBER Working Papers 12087, National Bureau of Economic Research, Inc.
  48. Vojislav Maksimovic & Gordon Phillips, 2008. "The Industry Life Cycle, Acquisitions and Investment: Does Firm Organization Matter?," Journal of Finance, American Finance Association, vol. 63(2), pages 673-708, 04.
  49. Dunne, T. & Roberts, M.J. & Samuelson, L., 1988. "Pattenrs Of Firm Entry And Exit In U.S. Manufacturing Industries," Papers 1-88-2, Pennsylvania State - Department of Economics.
  50. Peter MacKay & Gordon M. Phillips, 2005. "How Does Industry Affect Firm Financial Structure?," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1433-1466.
  51. Naveen Khanna, 2001. "The Bright Side of Internal Capital Markets," Journal of Finance, American Finance Association, vol. 56(4), pages 1489-1528, 08.
  52. Sharon Belenzon & Tomer Berkovitz & Patrick Bolton, 2009. "Intracompany Governance and Innovation," NBER Working Papers 15304, National Bureau of Economic Research, Inc.
  53. Federico Cingano & Fabiano Schivardi, 2003. "Identifying the Sources of Local Productivity Growth," Temi di discussione (Economic working papers) 474, Bank of Italy, Economic Research and International Relations Area.
  54. Heitor Almeida & Murillo Campello, 2007. "Financial Constraints, Asset Tangibility, and Corporate Investment," Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1429-1460, 2007 12.
  55. Luca Enriques & Paolo Volpin, 2007. "Corporate Governance Reforms in Continental Europe," Journal of Economic Perspectives, American Economic Association, vol. 21(1), pages 117-140, Winter.
  56. Campello, Murillo, 2003. "Capital structure and product markets interactions: evidence from business cycles," Journal of Financial Economics, Elsevier, vol. 68(3), pages 353-378, June.
  57. Vojislav Maksimovic & Gordon Phillips, 2002. "Do Conglomerate Firms Allocate Resources Inefficiently Across Industries? Theory and Evidence," Journal of Finance, American Finance Association, vol. 57(2), pages 721-767, 04.
  58. Gordon M Phillips & Vojislav Maksimovic, 1999. "Do Conglomerate Firms Allocate Resources Inefficiently?," Working Papers 99-11, Center for Economic Studies, U.S. Census Bureau.
  59. Chevalier, Judith A, 1995. " Do LBO Supermarkets Charge More? An Empirical Analysis of the Effects of LBOs on Supermarket Pricing," Journal of Finance, American Finance Association, vol. 50(4), pages 1095-1112, September.
  60. Phillips, Gordon M., 1995. "Increased debt and industry product markets An empirical analysis," Journal of Financial Economics, Elsevier, vol. 37(2), pages 189-238, February.
  61. Maksimovic, Vojislav, 1990. " Product Market Imperfections and Loan Commitments," Journal of Finance, American Finance Association, vol. 45(5), pages 1641-53, December.
  62. 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.
  63. Stijn Claessens & Simeon Djankov & Leora Klapper1, 2000. "The Role And Functioning Of Business Groups In East Asia And Chile," Abante, Escuela de Administracion. Pontificia Universidad Católica de Chile., vol. 3(1), pages 91 -107.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Michele Bernini & Sarah Guillou & Flora Bellone, 2013. "Firms' Leverage and Export Quality: Evidence from France," GREDEG Working Papers 2013-29, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
  2. repec:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p4sr364g4 is not listed on IDEAS
  3. Sarah Guillou & Michel Bernini & Flora Bellone, 2013. "Firms leverage and export quality evidence from France," Sciences Po publications 2013-13, Sciences Po.
  4. 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.
  5. 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.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:sef:csefwp:217. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lia Ambrosio).

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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