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Journal of Financial Economics Vol. 109 No. 1 2013

The deep-pocket effect of internal capital markets

Xavier Boutin1,2,3,4; Giacinta Cestone5,6; Chiara Fumagalli7,8; Giovanni Pica9,10,11,12,13,14; Nicolas Serrano-Velarde15,8

1 European Commission · 2 Directorate-General for Research and Innovation · 3 Centre for Research in Engineering Surface Technology · 4 Centre de Recherche en Économie et Statistique · 5 City, University of London · 6 European Corporate Governance Institute · 7 Centre for Economic Policy Research · 8 Bocconi University · 9 University of Salerno · 10 University of Milan · 11 Institute for the Dynamics of Environmental Processes · 12 Centre for Studies in Economics and Finance · 13 Centro Studi Luca d’Agliano · 14 University of Naples Federico II · 15 University of Oxford

open access

Abstract

We provide evidence that incumbent and entrant firms' access to business group deep pockets affects the entry patterns in product markets. Relying on a unique French data set on business groups, our paper shows that entry into manufacturing industries is negatively related to the cash hoarded by incumbent affiliated groups and positively related to entrant groups' cash. In line with theoretical predictions, we find that the impact of group cash holdingson entry is more important in environments where financial constraints are pronounced. The cash holdings of incumbent and entrant groups also affect the survival rate of entrants in the three- to five-year post-entry window. Overall, our findings suggest that internal capital markets operate within corporate groups and affect the product market behavior of affiliated firms by mitigating financial constraints.

DOI
10.1016/j.jfineco.2013.02.003
Volume
109
Issue
1
Pages
122-145
Language
en
Sources
crossref bibtex:phds-export.bib openalex

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