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.