The Deep-Pocket Effect of Internal Capital Markets
65 Pages Posted: 13 Feb 2013
Date Written: November 2012
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: Suggested Citation