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The Deep-Pocket Effect of Internal Capital Markets

Author

Listed:
  • Xavier Boutin

    (European Commission)

  • Giacinta Cestone

    (Cass Business School, CSEF, and ECGI)

  • Chiara Fumagalli

    (Università Bocconi)

  • Giovanni Pica

    (Università di Salerno, CSEF and Centro Luca d\'Agliano)

  • Nicolas Serrano-Velarde

    (Said Business School, Centre for Business Taxation, Oxford University)

Abstract

We provide 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, our paper shows that entry in manufacturing industries is negatively related to the cash hoarded by incumbent-affiliated 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 affiliated firms by mitigating financial constraints.

Suggested Citation

  • Xavier Boutin & Giacinta Cestone & Chiara Fumagalli & Giovanni Pica & Nicolas Serrano-Velarde, 2012. "The Deep-Pocket Effect of Internal Capital Markets," Development Working Papers 341, Centro Studi Luca d'Agliano, University of Milano, revised 13 Nov 2012.
  • Handle: RePEc:csl:devewp:341
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    File URL: http://www.dagliano.unimi.it//media/WP2012_341.pdf
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    Cited by:

    1. P. Charnoz & C. Lelarge & C. Trevien, 2017. "Communication Costs and the Internal Organization of Multi-Plant Businesses: Evidence from the Impact of the French High-Speed Rail," Working papers 635, Banque de France.
    2. Noth, Felix & Ossandon Busch, Matias, 2017. "Banking globalization, local lending, and labor market effects: Micro-level evidence from Brazil," IWH Discussion Papers 7/2017, Halle Institute for Economic Research (IWH).
    3. Giacinta Cestone & Chiara Fumagalli & Francis Kramaz & Giovanni Pica, 2015. "Insurance Between Firms: The Role of Internal Labor Markets," CSEF Working Papers 386, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 15 Feb 2017.
    4. Sarah Guillou & Michel Bernini & Flora Bellone, 2013. "Firms' leverage and export quality evidence from France," Sciences Po publications 2013-13, Sciences Po.
    5. repec:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p4sr364g4 is not listed on IDEAS
    6. Heitor Almeida & Murillo Campello & Igor Cunha & Michael S. Weisbach, 2014. "Corporate Liquidity Management: A Conceptual Framework and Survey," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 135-162, December.
    7. Giacinta Cestone & Chiara Fumagalli & Francis Kramarz & Giovanni Pica, 2017. "Insurance Between Firms: The Role of Internal Labor Markets," Working Papers 2017-89, Center for Research in Economics and Statistics.
    8. Gianpaolo Parise, 2016. "Threat of entry and debt maturity: evidence from airlines," BIS Working Papers 556, Bank for International Settlements.
    9. Gatzer, Sebastian & Hoang, Daniel & Ruckes, Martin, 2014. "Internal capital markets and diversified firms: Theory and practice," Working Paper Series in Economics 64, Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering.
    10. Gatzer, Sebastian & Hoang, Daniel & Ruckes, Martin, 2015. "Internal Capital Markets and Diversified Firms: Theory and Practice," EconStor Preprints 169432, ZBW - German National Library of Economics.
    11. 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.
    12. Noth, Felix & Busch, Matias Ossandon, 2017. "Banking globalization, local lending, and labor market effects : Micro-level evidence from Brazil," BOFIT Discussion Papers 11/2017, Bank of Finland, Institute for Economies in Transition.

    More about this item

    Keywords

    Business Groups; Cash Holdings; Internal Capital Markets; Entry;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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