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

43 Pages Posted: 10 Feb 2020 Last revised: 25 Aug 2020

See all articles by Jorge H. F. Mota

Jorge H. F. Mota

University of Aveiro - Department of Economics, Management, Industrial Engineering and Tourism; University of Aveiro - GOVCOPP; CICEE - Research Center in Economics & Business Sciences, Portugal

Mário Coutinho dos Santos

Catholic University of Portugal; CICEE - Research Center in Business & Economics; Catholic University of Portugal (UCP)

Multiple version iconThere are 2 versions of this paper

Date Written: January 22, 2020

Abstract

This paper examines several dimensions of the financing behavior of subsidiary of diversified firms and of their comparable single-segment firms. To investigate this, we use two balanced panels of 636-euro area firms each, over the 2004-2017 period. Our empirical analysis document that subsidiary firms are, on average, 6.07 percent more leveraged and exhibit a 2.80 percent lower cost of capital than their comparable stand-alone peers. Both types of firms have preferred target capital structures proxied by the medians of their industry leverage ratios. Results also document that stand-alone firms adjust their capital structures to their preferred leverage ratios at an 8.71 percent higher speed than ICM members. The paper contributes to the literature providing evidence on the role of incentives and informational asymmetries on firms financing behavior.

Keywords: cost of capital, financial leverage targets, speed of adjustment, internal capital markets

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

University of Aveiro - GOVCOPP ( email )

Campus de Santiago
Aveiro, 3810-193
Portugal

CICEE - Research Center in Economics & Business Sciences, Portugal ( email )

Rua Sta. Marta 47, 5.º Andar
Lisboa, 1150-293
Portugal

Mário João Coutinho dos Santos

Catholic University of Portugal ( email )

Lisbon
Portugal

CICEE - Research Center in Business & Economics ( email )

Lisbon
Portugal

Catholic University of Portugal (UCP) ( email )

Lisbon
Portugal

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