DP7184 The Deep Pocket Effect of Internal Capital Markets

Author(s): Xavier Boutin , Giacinta Cestone , Chiara Fumagalli , Giovanni Pica , Nicolas Serrano-Velarde

Publication Date: February 2009

Keyword(s): Business Groups , Deep-Pockets , Internal Capital Markets , Market Entry

JEL(s): G30 , L13 , L40

Programme Areas: Financial Economics , Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP7184.asp.asp

This paper provides evidence that incumbents' access to group deep pockets has a negative impact on entry in product markets. Relying on a unique French data set on business groups, the paper presents three major findings. First, consistent with theoretical predictions, the amount of financial resources owned by incumbent-affiliated groups has a negative impact on entry in a market. This suggests that internal capital markets operate within corporate groups and that they have a potential anti-competitive effect. Second, the impact on entry of group financial strength is more important in markets where access to external funding is likely to be more difficult. Third, the more active are internal capital markets, the more pronounced the effect on entry of group deep pockets.