Loss or Lost? Economic Consequences of Internal Capital Markets in Business Groups
59 Pages Posted: 21 Oct 2019 Last revised: 6 Dec 2019
Date Written: December 4, 2019
This paper examines when business groups support distressed member firms and how such group support impacts firm survival and productivity. I exploit plausibly exogenous variation in the value of loss-related tax shields that affect the incentives to support distressed member firms. Evidence from a cross-sectional difference-in-differences design based on a large international sample, as well as a single-country regression discontinuity design, suggests that business groups avoid member firms' defaults if loss-related tax shields are more valuable. This tax-motivated group support keeps low-quality member firms alive, resulting in lower productivity at the firm and the market level. The findings indicate that managers exploit tax-related cash incentives through internal capital markets at the cost of less efficient resource allocation.
Keywords: Business groups, Internal capital markets, Resource allocation, Financial distress, Losses, Corporate taxation, Zombie firms, Productivity
JEL Classification: G32, G33, H25, M41, M48, D22, D24
Suggested Citation: Suggested Citation