How Do Internal Capital Markets Work? Evidence from the Great Recession

63 Pages Posted: 20 Oct 2017 Last revised: 3 Sep 2019

See all articles by David Buchuk

David Buchuk

Pontificia Unievrsidad Católica de Chile

Borja Larrain

Pontificia Universidad Catolica de Chile

Mounu Prem

Universidad del Rosario

Francisco Urzúa I.

City University London - Sir John Cass Business School

Date Written: August 8, 2019

Abstract

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

Suggested Citation

Buchuk, David and Larrain, Borja and Prem, Mounu and Urzua, Francisco, How Do Internal Capital Markets Work? Evidence from the Great Recession (August 8, 2019). Available at SSRN: https://ssrn.com/abstract=3055780 or http://dx.doi.org/10.2139/ssrn.3055780

David Buchuk

Pontificia Unievrsidad Católica de Chile ( email )

Santiago
Chile

Borja Larrain

Pontificia Universidad Catolica de Chile ( email )

Ave. Vicuna Mackenna 4860, Macul
Santiago
Chile

HOME PAGE: http://economiayadministracion.uc.cl/personal/blarrain/

Mounu Prem (Contact Author)

Universidad del Rosario ( email )

Casa Pedro Fermín
Calle 14 # 4-69
Bogota
Colombia

Francisco Urzua

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
87
Abstract Views
540
rank
296,224
PlumX Metrics