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Beyond internal capital markets: the in-house transmission of adverse sales shocks and the collateral channel

Research output: Contribution to journalJournal article

Published
<mark>Journal publication date</mark>12/2007
<mark>Journal</mark>Journal of Corporate Finance
Issue number5
Volume13
Number of pages28
Pages (from-to)743-770
<mark>State</mark>Published
<mark>Original language</mark>English

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.