Advanced Search
MyIDEAS: Login to save this article or follow this journal

Incentives in Internal Capital Markets: Capital Constraints, Competition, and Investment Opportunities

Contents:

Author Info

  • Roman Inderst

    ()
    (INSEAD, LSE, CEPR)

  • Christian Laux

    ()
    (Goethe University Frankfurt, CFS)

Abstract

We examine the effect of competition for scarce corporate financial resources on managers' incentives to generate profitable investment opportunities. Operating an active internal capital market is unambiguously beneficial only if divisions have the same level of financial resources and the same investment potential. Otherwise, managers' incentives may be lower and an internal capital market may decrease firm value even though headquarters allocates capital efficiently. We analyze under which conditions the operation of an internal capital market is more likely to add value, and we derive implications for the boundaries of firms, for a potential conglomerate discount or premium, and for the role of incentive pay for division managers.

Download Info

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 36 (2005)
Issue (Month): 1 (Spring)
Pages: 215-228

as in new window
Handle: RePEc:rje:randje:v:36:y:2005:1:p:215-228

Contact details of provider:
Web page: http://www.rje.org

Order Information:
Web: https://editorialexpress.com/cgi-bin/rje_online.cgi

Related research

Keywords: Capital Budgeting; Investment Policy; cost of capital Firm Organization and Market Structure: Markets vs. Hierarchies; Vertical Integration; Conglomerates Firm Value; Firm; Firms; Investment;

Find related papers by JEL classification:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Akbel, Basak & Schnitzer, Monika, 2011. "Creditor rights and debt allocation within multinationals," Munich Reprints in Economics, University of Munich, Department of Economics 20174, University of Munich, Department of Economics.
  2. Oliver Hart & Bengt Holmstrom, 2010. "A Theory of Firm Scope," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 125(2), pages 483-513, May.
  3. Claude Francoeur & Alain Niyubahwe, 2009. "Sell-offs, internal capital markets, and long run performance: Canadian evidence," International Journal of Managerial Finance, Emerald Group Publishing, Emerald Group Publishing, vol. 5(4), pages 376-390, September.
  4. Marko Köthenbürger & Michael Stimmelmayr, 2013. "Taxing Multinationals in the Presence of Internal Capital Markets," CESifo Working Paper Series, CESifo Group Munich 4353, CESifo Group Munich.
  5. Yan, An & Yang, Zaihui & Jiao, Jie, 2010. "Conglomerate investment under various capital market conditions," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(1), pages 103-115, January.
  6. Renucci, Antoine, 2008. "Access to financing, rents, and organization of the firm," Journal of Corporate Finance, Elsevier, Elsevier, vol. 14(4), pages 337-346, September.
  7. Fosfuri, Andrea & Rønde, Thomas, 2009. "Leveraging resistance to change and the skunk works model of innovation," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 72(1), pages 274-289, October.
  8. Chongwoo Choe & In-Uck Park, 2012. "Information Transmission through Influence Activities," Development Research Unit Working Paper Series, Monash University, Department of Economics 53-12, Monash University, Department of Economics.
  9. Baule, Rainer, 2014. "Allocation of risk capital on an internal market," European Journal of Operational Research, Elsevier, Elsevier, vol. 234(1), pages 186-196.
  10. Choe, Chongwoo & Yin, Xiangkang, 2009. "Diversification discount, information rents, and internal capital markets," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 49(2), pages 178-196, May.
  11. Bradford, William & Chen, Chao & Zhu, Song, 2013. "Cash dividend policy, corporate pyramids, and ownership structure: Evidence from China," International Review of Economics & Finance, Elsevier, Elsevier, vol. 27(C), pages 445-464.
  12. Wulf, Julie, 2009. "Influence and inefficiency in the internal capital market," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 72(1), pages 305-321, October.

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:rje:randje:v:36:y:2005:1:p:215-228. 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: ().

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.