The Deep-Pocket Effect of Internal Capital Markets

Boutin, Xavier, Cestone, Giacinta, Fumagalli, Chiara, Pica, Giovanni and Serrano-Velarde, Nicolas (2013) The Deep-Pocket Effect of Internal Capital Markets. Centre for Business Taxation WP 12/17.

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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.

Item Type: Other Working Paper
Keywords: Business Groups, Cash Holdings, Internal Capital Markets, Entry
Centre: Oxford University Centre for Business Taxation > CBT Working Papers
Date Deposited: 13 Mar 2013 11:37
Last Modified: 15 Oct 2015 02:18

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