Internal Capital Markets in Business Groups and the Propagation of Credit Supply Shocks

40 Pages Posted: 18 Jun 2019

See all articles by Yu Shi

Yu Shi

International Monetary Fund (IMF)

Robert M. Townsend

Massachusetts Institute of Technology (MIT)

Wu Zhu

University of Pennsylvania

Date Written: May 2019

Abstract

Using business registry data from China, we show that internal capital markets in business groups can propagate corporate shareholders' credit supply shocks to their subsidiaries. An average of 16.7% local bank credit growth where corporate shareholders are located would increase subsidiaries investment by 1% of their tangible fixed asset value, which accounts for 71% (7%) of the median (average) investment rate among these firms. We argue that equity exchanges is one channel through which corporate shareholders transmit bank credit supply shocks to the subsidiaries and provide empirical evidence to support the channel.

Keywords: Interest rate ceilings, Supply and demand, Credit demand, Credit, Bank credit, Internal capital markets, business groups, bank lending, China, corporate shareholder, business group, equity share, leverage ratio, credit market

JEL Classification: G2, G3, O17, L23, E01, E52, G21, D4, F16

Suggested Citation

Shi, Yu and Townsend, Robert M. and Zhu, Wu, Internal Capital Markets in Business Groups and the Propagation of Credit Supply Shocks (May 2019). IMF Working Paper No. 19/111. Available at SSRN: https://ssrn.com/abstract=3405978

Yu Shi (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Robert M. Townsend

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Wu Zhu

University of Pennsylvania

Philadelphia, PA 19104
United States

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