Internal Capital Markets in Italian Business Groups : Evidence from the Financial Crisis

Using unique detailed data, we describe the role of internal capital markets in Italian business groups before and after the financial crisis, an exogenous event which provides an ideal setting to assess whether the working of internal capital markets helps group-affiliated firms to mitigate external financial constraints. Our findings support the hypothesis that internal capital markets are typically activated by firms standing at the top of the control chain given their easier access to external borrowing. Larger and more profitable firms serve as internal suppliers of capital and support financially constrained group members that struggle to stay viable. We also show that firms affiliated to larger and diversified groups benefit from the existence of internal mechanisms of resource reallocation that can substitute external finance when it becomes more expensive and hard to access. During the crisis, group-affiliated firms were more likely to survive than unaffiliated firms