Internal Capital Markets in Business Groups

Abstract

This paper extends a structural model of investment with costly external finance to firms in business groups, derives an empirical regression counterpart, and uses it to test for the existence of internal capital markets in business groups and various characteristics of a group that tend to affect within-group resource allocation. I use a unique firm-level data submitted to Thailand's Ministry of Commerce as a sample in the empirical sections. The results show that corporate ownership, control rights, and within-group intermediaries tend to facilitate the internal capital markets. Corporate laws that protect minority shareholders lead to the less efficient internal capital markets although the effect is indirectly through the smaller cash flow rights and voting rights of controlling shareholders over the listed firms as compared to the non-listed firms. Groups with more member firms that are structured vertically tend to have more efficient internal capital markets while horizontal structure has no effect on within-group resource allocation. Finally, the more industry diversification, the more efficient the internal capital markets in business groups. In sum, the paper provides empirical evidence from firm-level data that the structure of business groups and corporate governance are related to the investment behavior of firms.