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The Deep-Pocket Effect of Internal Capital Markets

  • Xavier Boutin

    (European Commission)

  • Giacinta Cestone

    (Cass Business School, CSEF, and ECGI)

  • Chiara Fumagalli

    (Universita Bocconi (Department of Economics), CEPR, CSEF, and Paolo Ba Centre)

  • Giovanni Pica

    (Universita di Salerno, CSEF and Centro Luca D'Agliano)

  • Nicolas Serrano-Velarde

    (Oxford University Centre for Business Taxation)

This paper provides 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, this paper shows that entry in manufacturing industries is negatively related to the cash hoarded by incumbent-affliated 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 affliated firms by mitigating financial constraints.

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Paper provided by Oxford University Centre for Business Taxation in its series Working Papers with number 1217.

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Date of creation: 2012
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Handle: RePEc:btx:wpaper:1217
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