Internal capital markets, ownership structure, and investment efficiency: Evidence from Taiwanese business groups

This study uses a unique data set to thoroughly investigate how the financing provided by a business groups' internal capital markets and control-enhancing ownership structure relate to investment efficiency. We find that group-affiliated firms that make more intensive use of related-party transactions that facilitate an internal capital market exhibit a reduced probability of under-investment. We also find that pyramidal (cross) ownership improves (weakens) investment efficiency suggesting different types of control-enhancing structure have strongly contrasting effects on investment efficiency. These findings reveal both the financing advantages and disadvantages of business groups.