Access to Capital is Shaping Corporate Groups in Europe

Professor Sharon Belenzon

Professor Sharon Belenzon

The effect of financial market development on the formation of European corporate groups is a topic largely unexplored. Particularly in the instance of internal capital markets and how external factors in the market are influencing organisations to form corporate groups across the various markets in Europe.

Our research analysed nearly 140 thousand European companies in 15 different European countries to see how country-level institutions affect group membership and found that half of those companies (50.6%) were part of a group.

In addition, the research showed how companies with higher capital needs are more likely to be affiliated with groups than those with low needs, especially in countries with less well developed financial markets. We believe it could be argued that this is because they are less able to access capital from external sources and, the results of our research suggest that less-developed markets disproportionately foster the formation of corporate groups in sectors where internal capital markets are especially beneficial.

As the study spanned 15 European countries, we were also able to draw overall conclusions across the continent the research also produced interesting country-specific data, including:

  • The United Kingdom has highly developed financial markets and therefore the distribution of group affiliation is quite even across industry dependence on external finance.
  • In Germany, however, we found that due to the capital intensive nature of typical German industries, think Siemens or BMW, the distribution is not as even as that of the United Kingdom. This was a key example as to 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.
  • Another interesting case was France — the French economy lies somewhere between a country like Great Britain, which has very developed financial markets, and Italy, which relies heavily on informal institutions. Regardless, here the findings indicated a significant level of group affiliation caused by French employment laws. For many employers it is easier to transfer employees from one part of the corporate group to another, rather than fire them. Hence, there is a high incentive for French companies to be a part of a group.

While on a country by country level we may see slight discrepancies as to the companies seek group affiliation, overall it is clear that the less developed the financial markets are in any country, the greater the need for ICM.

Full findings can be found in the paper titled, “Capital markets and firm organization: How financial development shapes European corporate groups” in the June edition of the journal “Management Science.” 

By Professor Sharon Belenzon, Duke University Fuqua School of Business

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