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

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.