The Flight Home Effect in Multinational Internal Capital Markets During the Great Recession

Abstract

We investigate whether the Great Recession induced a “flight home” effect in internal capital markets of European multinational firms. Using a difference-in-difference approach, we find a significant reduction in group borrowings by subsidiaries of European multinationals in Italy since 2008, compared to a propensity score matched sample of subsidiaries of local business groups. While the reduction in group borrowings by multinational subsidiaries is partially counterbalanced by an increase in bank borrowings, multinational subsidiaries reduced their investments more than local group subsidiaries. These effects are significantly stronger for subsidiaries of multinationals headquartered in a European country that has been hit harder by the Great Recession. The reduction in group borrowings is larger when the foreign parent is located at a greater distance from subsidiary.