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The internal workings of internal capital markets: Cross-country evidence

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  • Gugler, Klaus
  • Peev, Evgeni
  • Segalla, Esther

Abstract

We derive empirical predictions from the standard investment-cash flow framework on the functioning of internal capital markets (ICM), but circumvent its criticism by focusing on parent cash flow and investment opportunities. We test these predictions using a unique dataset of parent firms and their listed and unlisted subsidiaries in 90 countries over the period 1995–2006. We find that company and country institutional structures matter. (1) Ownership participation of the parent firm in the subsidiary plays a crucial role for the proper functioning of ICMs. The larger the ownership stake of the parent, the better the functioning of the ICM. (2) The best functioning cross-border ICMs can be found in the sub-sample of firms with parents from a country with “strong” institutions and subsidiaries from a country with “weak” institutions. (3) Unlisted subsidiaries are much more dependent on the ICMs their parents provide than listed subsidiaries. Thus, ICMs are not per se “bright” or “dark”, their proper functioning depends on how they are set up.

Suggested Citation

  • Gugler, Klaus & Peev, Evgeni & Segalla, Esther, 2013. "The internal workings of internal capital markets: Cross-country evidence," Journal of Corporate Finance, Elsevier, vol. 20(C), pages 59-73.
  • Handle: RePEc:eee:corfin:v:20:y:2013:i:c:p:59-73
    DOI: 10.1016/j.jcorpfin.2012.12.001
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    Cited by:

    1. repec:eee:iburev:v:27:y:2018:i:1:p:231-245 is not listed on IDEAS
    2. Gugler, Klaus & Mueller, Dennis C. & Peev, Evgeni & Segalla, Esther, 2013. "Institutional determinants of domestic and foreign subsidiaries’ performance," International Review of Law and Economics, Elsevier, vol. 34(C), pages 88-96.
    3. Estrin, Saul & Liang, Zhixiang & Shapiro, Daniel & Carney, Michael, 2018. "State capitalism, economic systems and the performance of state owned firms," LSE Research Online Documents on Economics 91944, London School of Economics and Political Science, LSE Library.

    More about this item

    Keywords

    Investment; Cash flow; Subsidiaries; Internal capital market; Ownership; Country governance;

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • F3 - International Economics - - International Finance
    • P5 - Economic Systems - - Comparative Economic Systems

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