Internal Capital Markets in Business Groups and Financing Constraints: Evidence from China's Listed Companies

This paper tests the function of internal capital markets in China's business groups. Our evidence shows that due to the scarce of necessary conditions and existence of severe tunneling, internal capital markets in China's groups aggravate financing constraints of affiliated listed companies. Because nonstate-owned groups have more intensive motivation to tunnel through internal capital markets, listed companies controlled by them have severer financing constraints than those controlled by state-owned groups. Listed companies controlled by local groups have severer financing constraints than those controlled by central groups.