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. Journal of Financial Economics, 109 (1). pp. 122-145.


We provide evidence that incumbent and entrant firms' access to business group deep pockets affects the entry patterns in product markets. Relying on a unique French data set on business groups, our paper shows that entry into 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 of group cash holdingson entry is more important in environments where financial constraints are pronounced. The cash holdings of incumbent and entrant groups also affect the survival rate of entrants in the three- to five-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.

Item Type: Article
Keywords: Business groups; Cash holdings; Internal capital markets; Entry
Subject(s): Taxation
Centre: Oxford University Centre for Business Taxation
Date Deposited: 13 Aug 2013 10:31
Last Modified: 14 Jul 2017 08:36
Funders: Not applicable

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