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The Benefits and Costs of Internal Markets: Evidence from Asia's Financial Crisis

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  • Claessens, Stijn
  • Djankov, Simeon
  • Fan, Joseph P.H.
  • Lang, Larry H.P.

Abstract

This study examines the role of internal capital markets and diversification during normal and turbulent times. We hypothesize that internal markets are more valuable for firms in countries with less-developed financial markets and that diversification generally reduces risk. To conduct our tests, we study 3,000 East Asian corporations over the period before and during the 1997-1998 financial crisis. We find support for the internal market hypothesis during normal times. We find, however, that more diversified firms perform worse during a crisis, especially in less-developed countries. This suggests that more diversification and greater usage of internal markets is associated with higher risk-taking, especially when external markets are less developed.

Suggested Citation

  • Claessens, Stijn & Djankov, Simeon & Fan, Joseph P.H. & Lang, Larry H.P., 2001. "The Benefits and Costs of Internal Markets: Evidence from Asia's Financial Crisis," CEI Working Paper Series 2001-15, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:hitcei:2001-15
    Note: This paper was presented at the conference on Designing Financial Systems in East Asia and Japan: Toward a Twenty-First Century Paradigm. This two-day conference was co-organized by the International Monetary Fund and the CEI. It was held during September 24-25, 2001 at Hitotsubashi Memorial Hall in Tokyo, Japan. A select group of academics, researchers and policy makers from around the world gathered to examine the timely issue of how the financial systems and corporate governance in East Asia and Japan should be redesigned in order to achieve sustainable economic development. The conference included six sessions with 17 papers. All the presented papers were added to the CEI series of working papers. The series, as well as the contents of the conference, can be reached at http://cei.ier.hit-u.ac.jp., First draft: June 1999; This version: March 2001
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    File URL: https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/13957/wp2001-15a.pdf
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    References listed on IDEAS

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    1. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
    2. David S. Scharfstein & Jeremy C. Stein, 2000. "The Dark Side of Internal Capital Markets: Divisional Rent‐Seeking and Inefficient Investment," Journal of Finance, American Finance Association, vol. 55(6), pages 2537-2564, December.
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    Cited by:

    1. Johnson Simon, 2002. "Coase and the Reform of Securities Markets," International Economic Journal, Taylor & Francis Journals, vol. 16(1), pages 1-19.
    2. Laeven, Luc, 2001. "International evidence on the value of product and geographic diversity," Policy Research Working Paper Series 2729, The World Bank.
    3. Hanazaki, Masaharu & 花崎, 正晴 & ハナザキ, マサハル & Liu, Qun & 劉, 群, 2003. "The Asian Crisis and Corporate Governance: Ownership Structure, Debt Financing, and Corporate Diversification," CEI Working Paper Series 2003-18, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.

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