Financial Capacity and Discontinuous Investment: Evidence from Emerging Market Multibusiness Firms

I provide a new characterization of internal capital markets in an emerging economy using daily divisional data on all Peruvian fish-processing firms. A regression discontinuity model exploiting government production bans on regulated divisions ("fishmeal") shows that the increased investment in the nonfishmeal divisions due to the bans is substantial (over 30% of the mean value), after controlling for productivity. The redeployment of financial capacity into nonfishmeal investments is particularly sharper when external financing is more costly and when firms are more closely monitored by creditors. The value-creating nature of this redeployment is supported by its positive effects on nonfishmeal exports.