Corporate Diversification, Vertical Integration, and Internal Capital Markets: A Cross-Country Study

In this paper I test the theory that internal capital markets are a motivation for both corporate diversification and vertical integration. I use a sample of 1560 firms from 39 countries. Using this data I also test theories about vertical integration and capital market development. I also test agency cost and taxation theories of diversification and vertical integration. I find a significant and negative relationship between corporate diversification and capital market development I find a significant and positive relationship between vertical integration and capital market development.