Internal capital markets and risk-taking: Evidence from China

Abstract

The internal capital market not only improves the group's resource allocation efficiency, but also has an impact on the behavior of listed companies. However, there is little literature examining the impact of intra-group capital market operations on corporate risk-taking. Based on this, using hand-collected internal capital markets data of Chinese business groups from 2007 to 2018, this study examines the impact of the internal capital market on risk-taking behavior and its transmission path. The findings show that the utilization of internal capital markets by firms helps to enhance the overall risk-taking level of the group. And this facilitation effect is more pronounced in private firms, firms with higher industry concentration, and better internal controls. The mechanism shows that internal capital market enhances the group risk-taking level mainly by alleviating financing constraints and relying on the linked guarantee mechanism. Furthermore, we find that the enhanced risk-taking level of the internal capital market has a significant positive impact on firm sustainable growth. The above findings enrich the research on internal capital markets and corporate risk-taking, and are important for guiding managers to take reasonable risk management.