How Do Internal Capital Markets Work? Evidence from the Great Recession
63 Pages Posted: 20 Oct 2017 Last revised: 3 Sep 2019
Date Written: August 8, 2019
We study the inner workings of internal capital markets during the 2008-9 recession using a unique dataset of loans between business-group firms in an emerging market. Intra-group loans increase quickly during the recession. Firms that are more central in the ownership network simultaneously increase lending and borrowing. Acting like simple intermediaries, central firms do not increase net lending. Our results imply that formal control rights are essential for intermediation in internal capital markets, particularly during distress. In line with previous results on winner-picking, receivers of intra-group loans are high-Q, financially-constrained firms, which also perform significantly better than providers during the recession.
Keywords: internal capital markets, great recession, business groups, centrality, control rights
JEL Classification: G32
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