The Deep-Pocket Effect of Internal Capital Markets

57 Pages Posted: 22 Jun 2011 Last revised: 7 Feb 2013

See all articles by Xavier Boutin

Xavier Boutin

CREST(LEI) and European Commission (DG Competition - Chief Economist Team)

Giacinta Cestone

Cass Business School, City University London; ECGI

Chiara Fumagalli

Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR)

Giovanni Pica

Idep, facoltà di economia; University of Milan - Department of Economics, Management and Quantitative Methods (DEMM); University of Milan - Centro Studi Luca d'Agliano (LdA); University of Naples Federico II - CSEF - Center for Studies in Economics and Finance

Nicolas Andre Benigno Serrano-Velarde

Bocconi University

Date Written: September 24, 2012

Abstract

We provide evidence suggesting that incumbent firms' access to group deep pockets has a negative impact on entry 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 reserves hoarded by incumbent-affiliated groups. 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. 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, Market Entry

JEL Classification: G32, G38, L41

Suggested Citation

Boutin, Xavier and Cestone, Giacinta and Fumagalli, Chiara and Pica, Giovanni and Serrano-Velarde, Nicolas Andre Benigno, The Deep-Pocket Effect of Internal Capital Markets (September 24, 2012). Journal of Financial Economics (JFE), Forthcoming; Paolo Baffi Centre Research Paper No. 2011-92 . Available at SSRN: https://ssrn.com/abstract=1868761 or http://dx.doi.org/10.2139/ssrn.1868761

Xavier Boutin (Contact Author)

CREST(LEI) and European Commission (DG Competition - Chief Economist Team) ( email )

18, Boulevard Adolphe-Pinard
92244 Malakoff Cedex
France

Giacinta Cestone

Cass Business School, City University London ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

ECGI ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Chiara Fumagalli

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy
+39 02 5836 5311 (Phone)
+39 02 5836 5318 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Giovanni Pica

Idep, facoltà di economia ( email )

Via Giuseppe Buffi 13
Lugano, Ticino 6900
Switzerland
+41586664784 (Phone)

University of Milan - Department of Economics, Management and Quantitative Methods (DEMM) ( email )

Via Conservatorio, 7
Milan, 20122
Italy

University of Milan - Centro Studi Luca d'Agliano (LdA) ( email )

Via P. Amedeo 34
Milano, Mi 20122
Italy

University of Naples Federico II - CSEF - Center for Studies in Economics and Finance ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Nicolas Andre Benigno Serrano-Velarde

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

HOME PAGE: http://https://sites.google.com/site/nicolasserranovelarde/

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