Financial constraints and continental business groups: Evidence from German Konzerns

Using a unique large panel of German firms, we examine whether participation in business groups (Konzerns) reduces the sensitivity of investment to cash flow. The main finding is that the investment sensitivity is significantly reduced for small firms. On the other hand, we do not find clear evidence that medium-sized and large firms participating in Konzerns have different sensitivity compared to that of their stand-alone counterparts. We conclude that the German business model, which embodies key elements of the continental business model, seems to alleviate capital market imperfections for medium-sized and large firms and fails to do so for small firms.