Conglomerate discounts or premia are derived by comparing market values of conglomerates with the market values of a matched portfolio of stand alone firms (the imputed value of the conglomerates). Usually this comparison is based on firm values. We show that in this case conglomerate discounts or premia are subject to a potential bias caused by different cash holdings of conglomerates and stand alone firms. We prove evidence of such a cash distortion for German data: as German conglomerates hold on average substantially higher cash positions than the matched portfolio of stand alones, excess firm values are systematically upwards biased. Deducting cash from firm value and calculating discounts or premia based on enterprise values removes the bias. Based on excess enterprise values we are able to show a modest, but statistically significant conglomerate discount in Germany that is about 6% on an enterprise value basis.

Large German corporations are often suspected to be isolated from organized external capital markets and instead rely on capital sources from within the corporate group or from closely connected universal banks. This paper firstly reviews and discusses the benefits and costs of financing through internal capital markets and close bank relationships. The theoretical analysis shows that there is no clear preference regarding the relative pros and cons of internal capital markets and such bank borrowing. Secondly, the paper empirically iestigates the joint effects of internal capital markets and bank borrowing on the internal cash flow dependence of iestment (iestment-cash flow sensitivity) which is often used to identify firms with financing constraints. For a sample of 220 German corporate groups, empirical evidence is found that the iestment-cash flow sensitivity for firms heavily using internal capital markets is higher than for firms relying more on bank financing and that iestment-cash flow sensitivities vary greatly depending on the degree of internal capital market activity and bank borrowing intensity. This is directly in contrast to existing empirical evidence documenting that firms that rely more on internal capital markets have lower iestment-cash flow sensitivities in tendency. It is suggested that separating samples into firms relying on internal capital markets and firms relying on bank financing gives no unambiguous empirical prediction for the iestment-cash flow sensitivities because the latter financing form might stem from a close universal bank relationship which has similar characteristics like an internal capital market. Furthermore, a descriptive analysis of firms with high iestment-cash flow sensitivities suggests that not all of these companies appear to be financially constrained. This supports recent research which claims that the iestment-cash flow sensitivity is not a useful measure of financing constraints.