How Do Internal Capital Markets Work? Evidence from the Great Recession

We study the inner workings of internal capital markets during the 2008-9 recession using a unique dataset of loans between business-group firms in an emerging market. Intra-group loans increase quickly during the recession. Firms that are more central in the ownership network simultaneously increase lending and borrowing. Acting like simple intermediaries, central firms do not increase net lending. Our results imply that formal control rights are essential for intermediation in internal capital markets, particularly during distress. In line with previous results on winner-picking, receivers of intra-group loans are high-Q, financiallyconstrained firms, which also perform significantly better than providers during the recession

The internal capital markets of business groups: Evidence from intra-group loans

We study business groups? internal capital markets using a unique data set on intra-group lending in Chile (1990–2009). In line with groups? financing advantage, firms that borrow internally have higher investment, leverage, and return on equity (ROE) than other firms. At the margin, controlling shareholders have higher cash-flow rights in borrowing firms than in lending firms. However, there is no robust evidence of minority shareholders losing out from intra-group loans as tunneling predicts. Our evidence is consistent with the idea that strict regulation and disclosure requirements for intra-group loans, which are features of the Chilean market, reduce the risk of expropriation in pyramids

Conceptual Framework for Lending Money Outside Business Groups: Evidence from Poland

This paper builds a framework for the study of the provision of loans by non-financial companies outside business groups. This framework aims to show the role of cash holdings in providing loans by non-financial companies and constitutes the background for future research of this phenomenon. We provide evidence of the use of cash holdings for loans provision outside business group on the basis of Polish case. In this purpose, we apply the General Method of Moments (GMM) approach. Our findings confirm, that non-financial private companies provide loans outside the business groups with the use of cash holdings retrieved from bank loans and cash flows. We contribute to the literature by indicating that in addition to the common use of cash holdings for financial flexibility and the internal capital market created inside business groups-enterprises' access to finance in transition economies could be also improved by loans provided by non-financial companies with the use of cash holdings