Why Do Family Business Groups Expand by Creating New Public Firms? The Role of Internal Capital Markets

We document a new channel through which a family business group's internal capital market supports its members. Using data from 44 countries, we provide evidence that groups use internal capital to incubate difficult-to-finance investment projects, facilitating their access to outside equity in a subsequent IPO. Such support is most observable when an IPO allows the family to maintain corporate control and reduce conglomeration costs, and when new-firm financing barriers are high. Our analysis is robust to an identification strategy exploiting exogenous internal capital variations and documents the channels through which groups provide pre-IPO support to their affiliates.