Abstract
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.
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