Beyond internal capital markets: The in-house transmission of adverse sales shocks and the collateral channel |
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| Authors: | Yuk Ying Chang Sudipto Dasgupta |
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| Affiliation: | aDepartment of Finance, Banking and Property, Massey University, New Zealand;bDepartment of Finance, The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong |
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| Abstract: | We study how shocks to some business segments affect investment in a firm's non-shock segments. We find that subsequent investment in the non-shock segments is significantly lower compared to segments of firms that do not experience shocks. Surprisingly, lower availability of internal funds does not account for the lower investment. We find that segment shocks propagate within the firm by decreasing the value of collateral assets and reducing the availability of external finance. Our results support the operation of an external finance collateral channel ([Kiyotaki, N., Moore, J., 1997. Credit cycles. Journal of Political Economy 105, 211–248.]) previously discussed in the literature. |
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| Keywords: | Internal capital markets Collateral channel Transmission mechanism |
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