Why Do Family Business Groups Expand by Creating New Public Firms? The Role of Internal Capital Markets

Why Do Family Business Groups Expand by Creating New Public Firms? The Role of Internal Capital Markets

August 21 2017

We document a new channel through which a family business group's internal capital market supports its members. Using data from 44 countries, we provide evidence that groups use internal capital to incubate difficult-to-finance investment projects, facilitating their access to outside equity in a subsequent IPO. Such support is most observable when an IPO allows the family to maintain corporate control and reduce conglomeration costs, and when new-firm financing barriers are high. Our analysis is robust to an identification strategy exploiting exogenous internal capital variations and documents the channels through which groups provide pre-IPO support to their affiliates.