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Market Structure, Internal Capital Markets, and the Boundaries of the Firm

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  • RICHMOND D. MATHEWS
  • DAVID T. ROBINSON

Abstract

We study how the creation of an internal capital market (ICM) can invite strategic responses in product markets that, in turn, shape firm boundaries. ICMs provide ex post resource flexibility, but come with ex ante commitment costs. Alternatively, stand-alones possess commitment ability but lack flexibility. By creating flexibility, integration can sometimes deter a rival's entry, but commitment problems can also invite predatory capital raising. These forces drive different organizational equilibria depending on the integrator's relation to the product market. Hybrid organizational forms like strategic alliances can sometimes dominate integration by offering some of its benefits with fewer strategic costs. Copyright (c) 2008 The American Finance Association.

Suggested Citation

  • 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.
  • Handle: RePEc:bla:jfinan:v:63:y:2008:i:6:p:2703-2736
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    Cited by:

    1. 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.
    2. Seru, Amit, 2014. "Firm boundaries matter: Evidence from conglomerates and R&D activity," Journal of Financial Economics, Elsevier, vol. 111(2), pages 381-405.
    3. Habib, Michel A. & Mella-Barral, Pierre, 2013. "Skills, core capabilities, and the choice between merging, allying, and trading assets," Journal of Mathematical Economics, Elsevier, vol. 49(1), pages 31-48.
    4. 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.
    5. Bodnaruk, Andriy & Manconi, Alberto & Massa, Massimo, 2016. "Cross-border alliances and risk management," Journal of International Economics, Elsevier, vol. 102(C), pages 22-49.
    6. Fang, Yiwei & Francis, Bill & Hasan, Iftekhar & Wang, Haizhi, 2012. "Product market relationships and cost of bank loans: Evidence from strategic alliances," Journal of Empirical Finance, Elsevier, vol. 19(5), pages 653-674.
    7. Andrey Malenko, 2011. "Optimal Design of Internal Capital Markets," 2011 Meeting Papers 442, Society for Economic Dynamics.
    8. Bodnaruk, Andriy & Massa, Massimo & Simonov, Andrei, 2013. "Alliances and corporate governance," Journal of Financial Economics, Elsevier, vol. 107(3), pages 671-693.
    9. Curtiss, Jarmila, 2012. "Determinants of Financial Capital Use: Review of theories and implications for rural businesses," Working papers 122846, Factor Markets, Centre for European Policy Studies.
    10. Curtiss, Jarmila, 2012. "Determinants of Financial Capital Use: Review of theories and implications for rural businesses," Factor Markets Working Papers 123, Centre for European Policy Studies.
    11. Pasquale Massimo Picone & Giovanni Battista Dagnino, 2016. "Revamping research on unrelated diversification strategy: perspectives, opportunities and challenges for future inquiry," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 20(3), pages 413-445, September.

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