Internal Capital Markets in Times of Crisis: The Benefit of Group Affiliation in Italy

Abstract

and participants to the Boston College Macro Lunch and to the Carroll School Finance Seminar for useful comments and suggestions. We are also grateful to Cerved for access to the Gruppi Italiani data set. The views expressed in this paper are those of the authors' alone and do not necessarily represent those of the institutions with which they are affiliated or the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Overlapping Networks of Credit and Control

“…Internal capital markets are particularly active during periods of distress. Our results are broadly consistent with previous evidence of intra-group equity investments during the Asian crisis in Korea (Almeida, Kim, and Kim, 2015), the performance of groups during the recent crisis in Europe (Lins, Volpin, and Wagner, 2013;Santioni, Schiantarelli, and Strahan, 2017), and the reallocation of capital in U.S. conglomerates during the subprime crisis (Matvos and Seru, 2014). None of these papers studies the intermediation of credit between firms like we do.…”

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

“…For example, Almeida, Kim, and Kim (2015) find that by using internal transfers Korean groups were able to sustain investment in high-growth firms during the Asian crisis. Santioni, Schiantarelli, and Strahan (2017) find that internal transfers reduced the failure rate of Italian group firms during the recent European crisis. 1 Gopalan, Nanda, and Seru (2007) find similar results on the bankruptcy rate of group firms in India.…”

“…For instance, there is evidence that loans between related firms are a sign of tunneling in China (Jiang, Lee, and Yue, 2010) and Mexico (La Porta, Lópezde-Silanes, and Zamarripa, 2003). On the other hand, Buchuk et al (2014), Gopalan, Nanda, and Seru (2007), and Santioni, Schiantarelli, and Strahan (2017) argue that loans alleviate financial constraints in their samples of Chilean, Indian, and Italian groups respectively.…”

Internal Capital Markets in Business Groups and the Propagation of Credit Supply Shocks

“…This paper relates most closely to internal capital market literature. There has been a large literature focusing on the capital or labor reallocation across sectors or segments within under common shareholder (Hoshi, Kashyap, and Scharfstein, 1991;Shin and Stulz, 1998;Ozbas and Scharfstein, 2009;Giroud and Mueller, 2015;Almeida, Kim, and Kim, 2015;Santioni, Schiantarelli, and Strahan, 2017). In contrast, we show that the internal capital market is not only effective in hedging risks across firms, but also important in transmitting credit supply shocks from the banking sector to the entire corporate sector.…”

“…Nonfinancial firms rely on internal capital markets to allocate capital and maximize profits. In many countries, such as Japan (Hoshi, Kashyap, and Scharfstein, 1991), South Korea (Almeida, Kim, and Kim, 2015), and Italy (Santioni, Schiantarelli, and Strahan, 2017), internal capital markets are prevalent within business groups: a group of legally independent firms under common ownership (Almeida et al, 2015). However, the literature so far has mostly documented subsidiary firms with a common shareholder hedging risks with each other.…”