Does Internal Capital Market Membership Matter for Financing Behavior? Evidence from the Euro Area

46 Pages Posted: 10 Feb 2020

See all articles by Jorge H. F. Mota

Jorge H. F. Mota

University of Aveiro - Department of Economics, Management, Industrial Engineering and Tourism

Mário João Coutinho dos Santos

Catholic University of Portugal

Multiple version iconThere are 2 versions of this paper

Date Written: January 22, 2020

Abstract

The paper examines firms’ financing behavior of internal capital market (ICM) members and their comparable single-segment firms in the euro area, in terms of capital structure, cost of capital, and the speed of adjustment towards preferred capital structure. Results indicate that both ICM members and single-segment comparable firms have preferred target capital structures proxied by industry’s leverage ratio median, and that subsidiary firms are significantly more leveraged and exhibit lower cost of capital than their counterparts. Results also document that ICM members adjust dynamically their capital structures to their preferred leverage ratios at a slower speed than stand-alone firms. Findings suggest that ICM membership mitigates incentive and informational problems.

Keywords: cost of capital, financial leverage targets, speed of adjustment, internal capital markets, bias-corrected estimators

JEL Classification: C33, C81, D25, G32, L22

Suggested Citation

Mota, Jorge H. F. and Coutinho dos Santos, Mário João, Does Internal Capital Market Membership Matter for Financing Behavior? Evidence from the Euro Area (January 22, 2020). Available at SSRN: https://ssrn.com/abstract=3532122 or http://dx.doi.org/10.2139/ssrn.3532122

Jorge H. F. Mota (Contact Author)

University of Aveiro - Department of Economics, Management, Industrial Engineering and Tourism ( email )

Campus Universitário de Santiago
Aveiro, 3810-193
Portugal

Mário João Coutinho dos Santos

Catholic University of Portugal ( email )

Palma de Cima
Lisboa, 1649-023
Portugal

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