Working Paper: NBER ID: w23541
Authors: Raffaele Santioni; Fabio Schiantarelli; Philip E. Strahan
Abstract: Italy’s economic and banking systems have been under stress in the wake of the Global Financial Crisis and Euro Crisis. Firms in business groups have been more likely to survive this challenging environment, compared to unaffiliated firms. Better performance stems from access to an internal capital market, and the survival value of groups increases, inter alia, with group-wide cash flow. We show that actual internal capital transfers increase during the crisis, and these transfers move funds from cash-rich to cash-poor firms and also to those with more favorable investment opportunities. The ability to borrow externally provides additional funds that are shared across group affiliated firms. Our results highlight the benefits of internal capital markets when external capital markets are tight or distressed.
Keywords: internal capital markets; business groups; firm survival; economic crisis; Italy
JEL Codes: G01; G21; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| internal capital markets (G19) | movement of capital from cash-rich to cash-poor firms (F21) |
| increased intragroup capital transfers (H87) | buffer against external financing constraints (G32) |
| financial health of group members (G50) | survival value of group affiliation during crisis years (D70) |
| external financial constraints (F34) | adverse effects on firm survival (L21) |
| affiliation with business groups (L14) | likelihood of firm survival during economic downturns (L25) |