How Do Internal Capital Markets Work? Evidence from the Great Recession*

We study the inner workings of internal capital markets during the 2008–09 recession using a unique dataset of loans between business group firms in an emerging market. Intragroup loans increase quickly during the recession. Firms that are more central in the ownership network simultaneously increase lending and borrowing. Acting like simple intermediaries, central firms do not increase net lending. Our results imply that formal control rights...