Do internal capital markets in business groups mitigate firms' financial constraints?

We develop a new rationale for capital allocation in business groups’ internal markets. show that productivity and pledgeable income jointly drive within an market. In financially constrained groups, efficient market can allocate marginal funds to firms have high pledgeability of because multiplier effect: dollar generates bigger increase investment. This result has important implications the group affiliation strategy. Whether or not but highly productive firm will benefit from depends on its borrowing capacity vis-à-vis other affiliates.