Macroeconomic fluctuation and internal capital allocation in business group *

In this paper, we use dataset of internal capital markets (ICM) between 2007 and 2019 to explore the mechanism of applying macroeconomic policy at the micro level. We find that the macroeconomic environment affects firms that use internal capital markets to mitigate negative shocks. In this way, ICM functions as a financial buffer in times of economic recession. In addition, the effect is significant at private enterprises (PEs) and regions where financial dependence is lower. During times of economic recession, PEs is strongly motivated to use ICM to mitigate negative shocks and increase the scale of internal cash transfer. Furthermore, firms in regions with a lower level of financial dependence have stronger motivations to use ICM and at a larger scale.