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Capital Markets and Firm Organization: How Financial Development Shapes European Corporate Groups

Author

Listed:
  • Sharon Belenzon

    () (Fuqua School of Business, Duke University, Durham, North Carolina 27708)

  • Tomer Berkovitz

    () (Graduate School of Business, Columbia University, New York, New York 10027)

  • Luis A. Rios

    () (Fuqua School of Business, Duke University, Durham, North Carolina 27708)

Abstract

We investigate the effect of financial development on the formation of European corporate groups. Because cross-country regressions are hard to interpret in a causal sense, we exploit exogenous industry measures to investigate a specific channel through which financial development may affect group affiliation: internal capital markets. Using a comprehensive firm-level data set on European corporate groups in 15 countries, we find that countries with less developed financial markets have a higher percentage of group affiliates in more capital-intensive industries. This relationship is more pronounced for young and small firms and for affiliates of large and diversified groups. Our findings are consistent with the view that internal capital markets may, under some conditions, be more efficient than prevailing external markets, and that this may drive group affiliation even in developed economies. This paper was accepted by Bruno Cassiman, business strategy.

Suggested Citation

  • Sharon Belenzon & Tomer Berkovitz & Luis A. Rios, 2013. "Capital Markets and Firm Organization: How Financial Development Shapes European Corporate Groups," Management Science, INFORMS, vol. 59(6), pages 1326-1343, June.
  • Handle: RePEc:inm:ormnsc:v:59:y:2013:i:6:p:1326-1343
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    File URL: http://dx.doi.org/10.1287/mnsc.1120.1655
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    References listed on IDEAS

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    3. Majid Ghorbani & Michael Carney, 2016. "The changing face of China’s billionaire-entrepreneurs," Asia Pacific Journal of Management, Springer, vol. 33(4), pages 881-902, December.
    4. Elena Kulchina, 2016. "Personal Preferences, Entrepreneurs’ Location Choices, and Firm Performance," Management Science, INFORMS, vol. 62(6), pages 1814-1829, June.
    5. Sharon Belenzon & Ulya Tsolmon, 2016. "Market frictions and the competitive advantage of internal labor markets," Strategic Management Journal, Wiley Blackwell, vol. 37(7), pages 1280-1303, July.
    6. Carney, Michael & Van Essen, Marc & Estrin, Saul & Shapiro, Daniel, 2017. "Business group prevalence and impact across countries and over time: what can we learn from the literature," LSE Research Online Documents on Economics 68281, London School of Economics and Political Science, LSE Library.
    7. Hyejun Kim & Jaeyong Song, 2017. "Filling institutional voids in emerging economies: The impact of capital market development and business groups on M&A deal abandonment," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 48(3), pages 308-323, April.
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