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Using business registry data from China, we show that internal capital markets in business groups can propagate corporate shareholders’ credit supply shocks to their subsidiaries. An average of 16.7% local bank credit growth where corporate shareholders are located would increase subsidiaries investment by 1% of their tangible fixed asset value, which accounts for 71% (7%) of the median (average) investment rate among these firms. We argue that equity exchanges is one channel through which corporate shareholders transmit bank credit supply shocks to the subsidiaries and provide empirical evidence to support the channel.

Capital market. --- Capital markets --- Market, Capital --- Finance --- Financial institutions --- Loans --- Money market --- Securities --- Crowding out (Economics) --- Efficient market theory --- Finance: General --- Investments: Stocks --- Money and Monetary Policy --- Economic Theory --- Financial Risk Management --- Formal and Informal Sectors --- Shadow Economy --- Institutional Arrangements --- Organization of Production --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Agriculture: Aggregate Supply and Demand Analysis --- Prices --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- General Financial Markets: General (includes Measurement and Data) --- International Financial Markets --- Monetary economics --- Economic theory & philosophy --- Investment & securities --- Credit --- Supply shocks --- Bank credit --- Stocks --- Money --- Economic theory --- Asset valuation --- Asset and liability management --- Supply and demand --- Capital market --- Asset-liability management --- China, People's Republic of