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Firm Value, Information Problems and the Internal Capital Market

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  • Lundstrum, Leonard L
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    Abstract

    We examine how information problems between the firm and the investor affect the value of an internal capital market. While the extant literature finds that, on average, the diversified firm's access to an internal capital market is positively related to firm value, this paper finds that the results hold only for firms which face low levels of information problems. Firms facing the high levels of information problems realize no value from internal capital market access, consistent with the Jensen Free Cash Flow hypothesis. When information problems are large, agency costs dominate any savings that result from using an internal capital market to avoid selling under-priced securities in the external capital markets. Copyright 2003 by Kluwer Academic Publishers

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    Bibliographic Info

    Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

    Volume (Year): 21 (2003)
    Issue (Month): 2 (September)
    Pages: 141-56

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    Handle: RePEc:kap:rqfnac:v:21:y:2003:i:2:p:141-56

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    Web page: http://springerlink.metapress.com/link.asp?id=102990

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    Cited by:
    1. Jie-Haun Lee & Whei-May Fan, 2014. "Investors’ perception of corporate governance: a spillover effect of Taiwan corporate scandals," Review of Quantitative Finance and Accounting, Springer, vol. 43(1), pages 97-119, July.
    2. Doukas, John A. & McKnight, Phillip J. & Pantzalis, Christos, 2005. "Security analysis, agency costs, and UK firm characteristics," International Review of Financial Analysis, Elsevier, vol. 14(5), pages 493-507.
    3. Mussie Teclezion, 2012. "The impact of international and industrial diversification strategies on the cash flow sensitivity of cash," Managerial Finance, Emerald Group Publishing, vol. 38(10), pages 977-992, October.
    4. Drobetz, Wolfgang & GrĂĽninger, Matthias C. & Hirschvogl, Simone, 2010. "Information asymmetry and the value of cash," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2168-2184, September.
    5. Iatridis, George, 2010. "International Financial Reporting Standards and the quality of financial statement information," International Review of Financial Analysis, Elsevier, vol. 19(3), pages 193-204, June.

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