hero working papers

The Deep-Pocket Effect of Internal Capital Markets

Number: 403
Year: 2011
Author(s): Xavier Boutin, Giacinta Cestone, Chiara Fumagalli, Giovanni Pica and Nicolas Serrano-Velarde
We provide evidence that incumbent and entrant rms' 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 nd 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.

Keywords: Business Groups, Cash Holdings, Internal Capital Markets, Entry
JEL codes: G32, G38, L41