A Study On The Mechanism That Internal Capital Market Relaxed Financing Constraints

In recent decades, china's economy is experiencing rapid growth of the world's rare. Fast-growing economy has brought many business opportunities for investment, But because of imperfect market regulations and asymmetric information,,china's enterprises, especially high-growth industry,enterprises are faced with such an embarrassment :On the one hand, there is many favorable investment opportunities in the market ,On the other hand, enterprises are facing serious financial constraints in the capital markets .Many favorable investment opportunities have to been give up because of lack of funds. In order to get rid of this unfavorable situation, some companies try to change the financing strategy and use of internal capital market to ease the financing constraints on external capital markets. However, because of lack of theoretical guidance, some enterprises do not recognize the connection between the internal capital market and external market in using internal market to relax external financing constraints.The research of this paper will give help to the Practitioner.Firstly, the paper elaborate the theory of internal capital market research results and analyze related concepts, characteristics, operation of internal market. Then, the author construct a Model which Described how did the internal market relax external financing constraints and divided the way that internal relax financing constraints into two types: income effect and substitute effect. The income effect show that the internal capital market can relax external financing constraints. The substitution effect mean that the existence of internal capital markets can not relax the external financing constraints. Finally, the article use the data of listed companies in electronic information industry and bio-pharmaceuticals industry to test the type that internal market relaxes financing constraints.The main work of this paper includes:①The paper constructed a model that internal market relax external financing constraints. The model analyze the type that internal market relax financing constraints and the corresponding conditions.②using of empirical research methods, the article examined the type that the internal market relaxed financing constraints in china from two perspective of enterprise value and cost of capital. Firstly, the relationship beteen the financing size of internal capital market and the value of the business was examined.Then according to the above two test result, the writer determine the type that internal market relaxed financing constraints of our country.The empirical result show that:①Financing size of internal capital market are positively related to enterprise Value Incremental. Positive correlation means internal market financing can increase business value.②Internal financing are both negatively correlated with equity capital cost increment and total capital cost increment. Negative correlation means financing from internal capital market can reduce the external financing cost. Mean while , Negative correlation shows Cost impact factor was Less than 1.From the empirical results①②,we can drawn the way that internal market relaxed external financing constraints was based on income effect.