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Journal of Financial Economics

The deep-pocket effect of internal capital markets

Journal of Financial Economics
Volume Issue
Volume 109, Issue 1
Page range
Pages 122-145
Date published:
By:
Xavier Boutin
Berkeley Research Group (BRG), Brussels, Belgium
Chiara Fumagalli
Università Bocconi, Department of Economics and Paolo Baffi Centre, Italy
Giovanni Pica
Università della Svizzera italiana (University of Italian Switzerland), Lugano, Switzerland
Nicolas Serrano-Velarde
Università Bocconi, Milan, Italy
Published Article
Working paper version
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.

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