It has often been speculated that companies owning multiple businesses may have an edge because they can move money around within the company rather than depend on outside funds. However, evidence of this has proven to be elusive, since such within-firm transactions are difficult to observe. Now, researchers at Duke University’s Fuqua School of Business have some of the best evidence to date showing how these “internal capital markets” may drive group affiliation for European companies.

Fuqua strategy Professor Sharon Belenzon, along with his doctoral student Luis Rios and Columbia researcher Tomer Berkowitz, analyzed nearly 140 thousand European firms in 15 different European countries to see how country-level institutions affect group membership. Beyond finding that half of those firms (50.6%) were part of a group, the researchers tested the effect of internal capital markets (ICM) as an incentive for companies to band together.

The analysis involved ranking industries by their intrinsic level of capital needs (which is based on technological features), while also ranking countries according to their level of financial development, as determined by World Bank indices. For example, shipbuilding is capital intensive relative to app development, while Great Britain has highly developed financial markets relative to Greece. The findings will be published in a paper titled “Capital markets and firm organization: How financial development shapes European corporate groups” in the June edition of the journal “Management Science.” Get the full paper here.

Results show companies with higher capital needs are more likely to be affiliated with groups than those with low needs, especially in countries with lower financial development. The authors argue that this is because they are unable to access capital from external sources: “This result suggests that less-developed markets disproportionately foster the formation of corporate groups in sectors where internal capital markets are especially beneficial.”

Results also show that smaller and younger firms may be the most likely to seek out groups in areas where capital is hard to come by. The paper points out that these findings have implications for business decisions like mergers and acquisitions, and for a more general understanding of how frictions in the external market for inputs (such as capital and labor) shape that way in which firms organize.  As explained by Belenzon: “How firms organize their economic activities, and the consequences of these choices are fundamental questions in the field of strategy.”

Firms from Austria, Ireland, Greece, Italy, Germany, Norway, Belgium, Denmark, France, Spain, the Netherlands, Finland, Sweden, Great Britain, and Switzerland were part of this study.

Here is some country specific analysis. Professor Belenzon can share additional insights in an interview.  

France (26,221 French companies were analyzed): ”France lies somewhere between a country like Great Britain, which has very developed financial markets, and Italy, which greatly relies on informal institutions.” A major reason why France has a significant level of group affiliation is due to its labor laws. Rather than going through the difficulties of firing an employee, a company can move a person to another part of the group. Hence, there is a high incentive for French companies to be a part of a group.”

Germany (36,438 German companies were analyzed): “Germany’s industries are often very capital intensive (think BMW and Siemens), so this is a good example of why it is important to take into account both financial development and industry representation within an economy in order to understand the drivers of group affiliation.”

Switzerland (1,402 Swiss companies were analyzed): “Switzerland’s robust financial institutions were a good predictor of its low level of group affiliation, as we would have expected”

United Kingdom (27,146 British companies were analyzed): 
“Great Britain has highly developed financial markets and therefore the distribution of group affiliation is quite even across industry dependence on external finance.”

“Capital markets and firm organization: How financial development shapes European corporate groups,” Sharon Belenzon, Tomer Berkovitz, Luis Rios
Management Science, Online February 1, 2013




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