The Internal Working of Internal Capital Markets: Cross.Country Evidence

Klaus Gugler, Evgeni Peev, Esther Segalla

Publication: Scientific journalJournal articlepeer-review

27 Downloads (Pure)


We derive empirical predictions from the standard investment-cash flow framework on the
functioning of internal capital markets (ICM), but circumvent its criticism by focusing on
parent cash flow and investment opportunities. We test these predictions using a unique
dataset of parent firms and their listed and unlisted subsidiaries in 90 countries over the period
1995-2006. We find that company and country institutional structures matter. (1) Ownership
participation of the parent firm in the subsidiary plays a crucial role for the proper functioning
of ICMs. The larger the ownership stake of the parent, the better the functioning of the ICM. (2)
The best functioning cross-border ICMs can be found in the sub-sample of firms with parents
from a country with "strong" institutions and subsidiaries from a country with "weak" institutions. (3) Unlisted subsidiaries are much more dependent on the ICMs their parents
provide than listed subsidiaries. Thus, ICMs are not per se "bright" or "dark", their proper
functioning depends on how they are set up.
Original languageEnglish
Pages (from-to)59 - 73
JournalJournal of Corporate Finance
Publication statusPublished - 2013

Cite this