Advanced Search
MyIDEAS: Login

Internal capital markets, empire building, and capital structure

Contents:

Author Info

  • Prezas, Alexandros P.
Registered author(s):

    Abstract

    Internal funds generated by assets in place are available to finance the bulk of new investment by nonfinancial firms. Self-interested management has incentives to misallocate these funds in order to increase their control rents. There are two ways to impact future discretionary investment. First, using debt diverts funds to creditors and away from management. Second, having in place more assets that do not provide internal financing reduces the funds subject to managerial discretion. Investment in such assets and debt financing are inversely related in controlling self-interested management. As a result, firms borrow more and own proportionally more assets that provide internal funds as the average profitability of these assets, or that of future investment, increases. Firms may borrow less while increasing investment in the less valuable assets that do not supply internal financing as the expected profitability of these assets increases.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.sciencedirect.com/science/article/B6V7T-4TGS7GB-1/2/afc4e15b6575f8aa7ec1d50b6e73d7b6
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economics and Business.

    Volume (Year): 61 (2009)
    Issue (Month): 3 ()
    Pages: 173-188

    as in new window
    Handle: RePEc:eee:jebusi:v:61:y:2009:i:3:p:173-188

    Contact details of provider:
    Web page: http://www.elsevier.com/locate/jeconbus

    Related research

    Keywords: Capital structure Internal capital markets Asset allocation Empire building;

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Servaes, Henri, 1994. "Do Takeover Targets Overinvest?," Review of Financial Studies, Society for Financial Studies, vol. 7(2), pages 253-77.
    2. Sanford Grossman & Oliver Hart, . "Corporate Financial Structure and Managerial Incentives," Rodney L. White Center for Financial Research Working Papers 21-79, Wharton School Rodney L. White Center for Financial Research.
    3. Raghuram Rajan & Henri Servaes & Luigi Zingales, 1998. "The Cost of Diversity: The Diversification Discount and Inefficient Investment," NBER Working Papers 6368, National Bureau of Economic Research, Inc.
    4. Oliver Hart & John Moore, 1995. "Debt and Seniority: An Analysis of the Role of Hard Claims in Constraining Management," NBER Working Papers 4886, National Bureau of Economic Research, Inc.
    5. Thakor, Anjan V., 1993. "Information, Investment Horizon, and Price Reactions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(04), pages 459-482, December.
    6. Eugene F. Fama & Kenneth R. French, . "The Corporate Cost of Capital and the Return on Corporate Investment," CRSP working papers 355, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    7. Owen Lamont, 1996. "Cash Flow and Investment: Evidence from Internal Capital Markets," NBER Working Papers 5499, National Bureau of Economic Research, Inc.
    8. Bengt Holmstrom & I. Ricard & Joan Costa, 1984. "Managerial Incentives and Capital Management," Cowles Foundation Discussion Papers 729, Cowles Foundation for Research in Economics, Yale University.
    9. Robert H. Gertner & David S. Scharfstein & Jeremy C. Stein, 1994. "Internal versus External Capital Markets," NBER Working Papers 4776, National Bureau of Economic Research, Inc.
    10. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    11. Jeremy C. Stein, 1995. "Internal Capital Markets and the Competition for Corporate Resources," NBER Working Papers 5101, National Bureau of Economic Research, Inc.
    12. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
    13. Stewart C. Myers, 1993. "Still Searching For Optimal Capital Structure," Journal of Applied Corporate Finance, Morgan Stanley, vol. 6(1), pages 4-14.
    14. Harris, Milton & Raviv, Artur, 1990. " Capital Structure and the Informational Role of Debt," Journal of Finance, American Finance Association, vol. 45(2), pages 321-49, June.
    15. Li, David D & Li, Shan, 1996. " A Theory of Corporate Scope and Financial Structure," Journal of Finance, American Finance Association, vol. 51(2), pages 691-709, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:eee:jebusi:v:61:y:2009:i:3:p:173-188. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.