1 research outputs found
Do internal capital markets in business groups mitigate firms' financial constraints?
We develop a new rationale for capital allocation in business groups’ internal capital markets. We show
that productivity and pledgeable income jointly drive capital allocation within an internal capital market.
In financially constrained business groups, an efficient internal capital market can allocate marginal funds
to firms that have high pledgeability of income because of a multiplier effect: a dollar of internal funds
generates a bigger increase in investment. This result has important implications for the business group
affiliation strategy. Whether or not a financially constrained but highly productive firm will benefit from
group affiliation depends on its borrowing capacity vis-Ã -vis other affiliates