The Deep-Pocket Effect of Internal Capital Markets

65 Pages Posted: 13 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 Serrano-Velarde

University of Oxford - Center for Business Taxation

Multiple version iconThere are 3 versions of this paper

Date Written: November 2012

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.

Keywords: Business Groups, Cash Holdings, Internal Capital Markets, Entry

JEL Classification: G32, G38, L41

Suggested Citation

Boutin, Xavier and Cestone, Giacinta and Fumagalli, Chiara and Pica, Giovanni and Serrano-Velarde, Nicolas, The Deep-Pocket Effect of Internal Capital Markets (November 2012). Centro Studi Luca d'Agliano Development Studies Working Paper No. 341. Available at SSRN: https://ssrn.com/abstract=2214972 or http://dx.doi.org/10.2139/ssrn.2214972

Xavier Boutin

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 (Contact Author)

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 Serrano-Velarde

University of Oxford - Center for Business Taxation ( email )

Park End Street
Oxford, Oxfordshire OX1 1HP
United Kingdom

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