The Deep-Pocket Effect of Internal Capital Markets

We provide evidence suggesting that incumbent firms' access to group deep pockets has a negative impact on entry in product markets. Relying on a unique French data set on business groups, our paper shows that entry in manufacturing industries is negatively related to the cash reserves hoarded by incumbent-affiliated groups. In line with theoretical predictions, we find that the impact on entry of group cash holdings is more important in environments where financial constraints are pronounced and in more financially dependent sectors. Our findings suggest that internal capital markets operate within corporate groups and affect the product market behavior of affiliated firms by mitigating financial constraints