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Using a sample of 12,136 firm-years between 1993 and 1998, I examine the investment policies of firms in Japanese industrial groups. My findings indicate that internal capital markets among keiretsu firms are active. Investment at the firm level is positively correlated with cash flows from the remainder of the keiretsu. Furthermore, firms in industrial groups tend to invest more than predicted if their growth opportunities are below-average and invest less than predicted if their growth opportunities are above-average. These findings suggest that the reallocation of capital within keiretsu firms is inefficient.
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