Internal Capital Markets in Family Business Groups During the Global Financial Crisis

Abstract

This study investigates how family business group members’ investment decisions are affected by an exogenous shock, namely the 2008 Global Financial Crisis (GFC). Specifically, we investigate whether the internal capital markets in family business groups around the world alleviate the financial crisis-induced external financing constraints. We find that during the GFC the family group-affiliated firms on average cut investments by less than similar standalone firms. We also find that investments of group firms during the GFC become less sensitive to their own cash flows and more sensitive to the cash flows of other group members, especially those with greater financial slack, compared to the pre-crisis period. For a subsample of diversified groups, we propose an identification strategy, which shows that the post-crisis change in a group firm’s investment is determined by exogenous variations in its affiliated firms’ cash flows. Finally, we find that groups utilize equity primarily in the form of seasoned equity offerings (SEOs) to channel capital to affiliated firms during the GFC. The evidence highlights the important capital allocation role performed by the internal capital markets of business groups when external markets function poorly.