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We investigate the effect of financial development on the formation of European corporate groups. Because cross-country regressions are hard to interpret in a causal sense, we exploit exogenous industry measures to investigate a specific channel through which financial development may affect group affiliation: internal capital markets. Using a comprehensive firm-level data set on European corporate groups in 15 countries, we find that countries with less developed financial markets have a higher percentage of group affiliates in more capital-intensive industries. This relationship is more pronounced for young and small firms and for affiliates of large and diversified groups. Our findings are consistent with the view that internal capital markets may, under some conditions, be more efficient than prevailing external markets, and that this may drive group affiliation even in developed economies.
The original, published article is available at: http://dx.doi.org/10.1287/mnsc.1120.1655
corporate groups, financial development, internal capital markets
Belenzon, S., Berkovitz, T., & Rios, L. A. (2013). Capital Markets and Firm Organization: How Financial Development Shapes European Corporate Groups. Management Science, 59 (6), 1326-1343. http://dx.doi.org/10.1287/mnsc.1120.1655
Date Posted: 19 February 2018
This document has been peer reviewed.