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2023 | OriginalPaper | Chapter

23. Friends with Benefits: The Role of Internal Capital Markets During Financial Stress

Authors : Suparna Biswas, Saumitra N. Bhaduri

Published in: India’s Contemporary Macroeconomic Themes

Publisher: Springer Nature Singapore

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Abstract

Business Groups continue to be a major contributor to the Indian economy and hence their influence on economic performance has intrigued researchers. It has often been argued that the unique business structure of group firms, leads to the formation of an internal capital market that renders the member firms certain advantages compared to their stand-alone counterparts. Firms in a business group can invest in each other’s business ventures and help other member firms in meeting their obligations. Therefore, during times of crisis, group-affiliated firms are likely to have better chances of surviving. Our study examines this hypothesis by deploying an empirical framework to show how the benefits of internal capital markets to group-affiliated firms amplify during an economic downturn. The results show that when economic conditions are challenging, group-affiliated firms have lesser chances of facing financial stress as opposed to stand-alone firms. Further, the study provides evidence that the intra-firm transfer increases during the crisis and that the reliance on trade credit and external loan tend to reduce for group-affiliated firms vis-à-vis stand-alone firms during the crisis.

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Appendix
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Footnotes
2
Although there has been a growing body of literature on business groups in India, however, very little has been explored in the context of a business cycle downturns when the access to the external markets are more difficult than usual. Gopalan et al. (2007) show that intra-group fund transfer helps financially weaker firms as represented by firms with low cash flow, but it does not show the specific value of internal capital market during times of crisis or economic downturn.
 
3
Though Chittedi (2015) shows crisis period to be till December, 2011. However, it has been documented how the Indian economy went through a slowdown for three years till 2014.
 
5
As defined earlier, Recession is based on a business cycle definition, while Crisis using the post-2007 definition, are incorporated using two alternative specifications. However, to maintain brevity, while writing equations only Recession is used. Throughout the paper the term Recession is used which encompasses both the definitions used in this paper.
 
6
Net Transfer = borrowings from other member firms in the group—the lending to the member firms in the group.
 
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Metadata
Title
Friends with Benefits: The Role of Internal Capital Markets During Financial Stress
Authors
Suparna Biswas
Saumitra N. Bhaduri
Copyright Year
2023
Publisher
Springer Nature Singapore
DOI
https://doi.org/10.1007/978-981-99-5728-6_23