Internal Capital Market and Investment Decisions in Small and Medium-Sized Groups

  • Donato Iacobucci
Part of the Contributions to Economics book series (CE)


The main hypothesis of this paper is that firms belonging to business groups are expected to be less financially constrained in their investment policies because they can rely on the transfer of resources from other affiliated companies. This is specifically relevant for small firms and in the presence of external real and financial shocks. The presence of an internal capital market in small and medium-sized groups is tested by comparing the cash flow-investment sensitivity between affiliated and non-affiliated companies. This hypothesis has already been empirically tested. However, up to now empirical studies have referred to large groups in emerging economies. Overall the results confirm the main hypothesis. To the extent that cash flow-investment sensitivity is interpreted as the presence of financial constraints, the results of the paper show that belonging to a business group reduces the financing constraints when raising funds to finance investment.


Cash Flow Business Group Intangible Asset Minority Shareholder Financing Constraint 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


  1. Almeida H, Wolfenzon D (2006) A theory of pyramidal ownership and family business groups. Journal of Finance LXI:2637–2680CrossRefGoogle Scholar
  2. Audretsch DB, Elston JA (2002) Does firm size matter? Evidence on the impact of liquidity constraints on firm investment behavior in Germany. Int J Ind Organ 20:1CrossRefGoogle Scholar
  3. Belenzon S, Berkovitz T (2010) Innovation in business groups. Managt Sci 56:519–535CrossRefGoogle Scholar
  4. Bertrand M, Mehta P, Mullainathan S (2002) Ferreting out tunneling: an application to Indian business groups. Q J Econ 117:121–148CrossRefGoogle Scholar
  5. Blanchard P, Huiban JP, Sevestre P (2005) R&D and productivity in corporate groups: an empirical investigation using a panel of French firms. Annales d’économie et de statistique 79/80:461–485Google Scholar
  6. Cainelli G, Iacobucci D (2007) Agglomeration, technology and business groups. Edward Elgar, CheltenhamGoogle Scholar
  7. Cainelli G, Iacobucci D (2011) Business groups and the boundaries of the firm. Manage Decis 49:1549–1573CrossRefGoogle Scholar
  8. Cameron AC, Trivedi PK (2005) Microeconometrics: methods and applications. Cambridge University Press, Cambridge, p 100CrossRefGoogle Scholar
  9. Campello M, Graham JR, Harvey CR (2010) The real effects of financial constraints: evidence from a financial crisis. J Financ Econ 97:470–487CrossRefGoogle Scholar
  10. Carney M, Gedajlovic ER, Heugens PPMAR, Van Essen M, Van Oosterhout J (2011) Business group affiliation, performance, context, and strategy: a meta-analysis. Acad Manage J 54:437–460CrossRefGoogle Scholar
  11. Cayssialis J-L, Kremp E, Peter C (2007) Dix Années De Dynamique Financière Des PME En France, Paris, Banque de France Bulletin, p 165Google Scholar
  12. Chang S-J, Chung CN, Mahmood IP (2006) When and how does business group affiliation promote firm innovation? A tale of two emerging economies. Organ Sci 17:637–656CrossRefGoogle Scholar
  13. Cheung Y-L, Rau P, Stouraitis A (2006) Tunneling, propping, and expropriation: evidence from connected party transactions in Hong Kong. J Financ Econ 82:343–386CrossRefGoogle Scholar
  14. Claessens S, Djankov S, Lang LH (2000) The separation of ownership and control in East Asian corporations. J Financ Econ 58:81–112CrossRefGoogle Scholar
  15. Cleary S (1999) The relationship between firm investment and financial status. J Finance 54:673–692CrossRefGoogle Scholar
  16. Colpan AM, Hikino T, Lincoln JR (2010) The oxford handbook of business groups. Oxford University Press, OxfordCrossRefGoogle Scholar
  17. Dow S, Mcguire J (2009) Propping and tunneling: empirical evidence from Japanese keiretsu. J Bank Finance 33:1817–1828CrossRefGoogle Scholar
  18. Faccio M, Lang LH (2002) The ultimate ownership of Western European corporations. J Financ Econ 65:365–395CrossRefGoogle Scholar
  19. Fazzari SM, Hubbard RG, Petersen BC (1988) Financing constraints and corporate investment. Brook Pap Econ Act 1:141–195CrossRefGoogle Scholar
  20. Friedman E, Johnson S, Mitton T (2003) Propping and tunneling. J Comp Econ 31:732–750CrossRefGoogle Scholar
  21. George R, Kabir R (2008) Business groups and profit redistribution: a boon or bane for firms? J Bus Res 61:1004–1014CrossRefGoogle Scholar
  22. George R, Kabir R, Qian J (2011) Investment-cash flow sensitivity and financing constraints: new evidence from Indian business group firms. J Multinatl Financ Manage 21:69–88CrossRefGoogle Scholar
  23. Goergen M, Renneboog L (2001) Investment policy, internal financing and ownership concentration in the UK. J Corp Finance 7:257–284CrossRefGoogle Scholar
  24. Gopalan R, Nanda V, Seru A (2007) Affiliated firms and financial support: evidence from Indian business groups. J Financ Econ 86:759–795CrossRefGoogle Scholar
  25. Hamelin A (2011) Small business groups enhance performance and promote stability, not expropriation. Evidence from French SMEs. J Bank Finance 35:613–626CrossRefGoogle Scholar
  26. Hsieh T-J, Yeh R-S, Chen Y-J (2010) Business group characteristics and affiliated firm innovation: the case of Taiwan. Ind Market Manage 39:560–570CrossRefGoogle Scholar
  27. Iacobucci D (2002) Explaining business groups started by habitual entrepreneurs in the Italian manufacturing sector. Entrepreneurship Reg Dev 14:31–48CrossRefGoogle Scholar
  28. Iacobucci D, Rosa P (2005) Growth, diversification and business group formation in entrepreneurial firms. Small Bus Econ 25:65–82CrossRefGoogle Scholar
  29. Iacobucci D, Rosa P (2010) The growth of business groups by habitual entrepreneurs: the role of entrepreneurial teams. Entrepreneurship Theory Pract 34:351–377CrossRefGoogle Scholar
  30. Ivashina V, Scharfstein D (2010) Bank lending during the financial crisis of 2008. J Financ Econ 97:319–338CrossRefGoogle Scholar
  31. Kaplan SN, Zingales L (1997) Do financing constraints explain why investment is correlated with cash flow? Q J Econ 109:565–592Google Scholar
  32. Lechner C, Leyronas C (2009) Small-business group formation as an entrepreneurial development model. Entrepreneurship Theory Pract 33:645–667CrossRefGoogle Scholar
  33. Lensink R, van der Molen R, Gangopadhyay S (2003) Business groups, financing constraints and investment: the case of India. J Dev Stud 40:93–119CrossRefGoogle Scholar
  34. Loiseau H (2001) Des Groupes De La Taille D’une PME. Un Phenomen En Plein Essor. INSEE PremièreGoogle Scholar
  35. Morck R, Yeung B (2003) Agency problems in large family business groups. Entrepreneurship Theory Pract 27:367–382CrossRefGoogle Scholar
  36. Myers SC (2000) Outside equity. J Finance 55:1005–1037CrossRefGoogle Scholar
  37. Myers SC, Majluf NS (1984) Corporate financing and investment decisions when firsm have information investors do not have. J Financ Econ 13:187–222CrossRefGoogle Scholar
  38. Pavitt K (1984) Sectoral patterns of technical change: towards a taxonomy and a theory. Res Policy 13:343–373CrossRefGoogle Scholar
  39. Rosa P, Scott M (1999) The prevalence of multiple owners and directors in the SME sector: implications for our understanding of start-up and growth. Entrepreneurship Reg Dev 11:21–38CrossRefGoogle Scholar
  40. Shin H-H, Park YS (1999) Financing constraints and internal capital markets: evidence from Korean “chaebols”. J Corp Finance 5:169–191CrossRefGoogle Scholar
  41. Stein JC (2003) Agency, information and corporate investment. In: Constantinides GM (ed) Corporate finance. Elsevier, Amsterdam, pp 111–165Google Scholar
  42. Unicredit (2008) Decima Indagine sulle imprese manifatturiere Italiane. MilanoGoogle Scholar
  43. Whited TM (2009) What can cash shortfalls and windfalls tell us about finance constraints? In: Calcagnini G, Saltari E (eds) The economics of imperfect markets. Physica-Verlag Berlin Heiderlberg, pp 17–32 see: &printsec=frontcover&hl=it&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false Google Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2012

Authors and Affiliations

  1. 1.Dipartimento di Ingegneria dell’InformazioneUniversità Politecnica delle MarcheMonte DagoItaly

Personalised recommendations