This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Reallocation of Corporate Resources and Managerial Incentives in Internal Capital Markets

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Brusco, Sandro
Panunzi, Fausto

Additional information is available for the following registered author(s):

Abstract

One distinguishing feature of internal capital markets is their ability to reallocate funds in favour of the most profitable divisions (winner-picking). Yet, diversified firms often trade at a discount with respect to their focused counterparts. The literature has tried to explain the apparent misallocation of resources with lobbying activities or power struggles. We show that the diversification discount can be explained even in a model where resources are efficiently allocated ex post. When managers obtain utility from the funds under their purview, moving funds across divisions may diminish their incentives. The ex ante reduction in managerial incentives can more than offset the increase in firm value due to the ex post efficient reallocation of funds. If headquarters have some commitment power, it is in general optimal to commit not to reallocate at least a fraction of funds. As a result, the investment in a given division is (optimally) more sensitive to the division's cash flow than to other divisions' cash flow, as confirmed by the empirical studies on internal capital markets. Our theory complements the view that links the diversification discount to the inefficient functioning of internal capital markets.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. 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.cepr.org/pubs/dps/DP2532.asp
File Format: application/pdf
File Function:
Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

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.

Publisher Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2532.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length:
Date of creation: Sep 2000
Date of revision:
Handle: RePEc:cpr:ceprdp:2532

Contact details of provider:
Postal: Centre for Economic Policy Research, 53--56 Great Sutton Street, London EC1V 0DG
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820

Order Information:
Email:

For technical questions regarding this item, or to correct its listing, contact: ().

Related research
Keywords: Internal Capital Markets; Managerial Incentives; Winner-Picking;

Other versions of this item:

Find related papers by JEL classification:
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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.:

  1. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 1-29, February.
    Other versions:
  2. Brusco, Sandro & Panunzi, Fausto, 2000. "Reallocation of Corporate Resources and Managerial Incentives in Internal Capital Markets," CEPR Discussion Papers 2532, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Jeremy C. Stein, 2001. "Agency, Information and Corporate Investment," NBER Working Papers 8342, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Stein, Jeremy C, 1997. " Internal Capital Markets and the Competition for Corporate Resources," Journal of Finance, American Finance Association, vol. 52(1), pages 111-33, March. [Downloadable!] (restricted)
    Other versions:
  5. Jeremy C. Stein, 2000. "Information Production and Capital Allocation: Decentralized vs. Hierarchical Firms," NBER Working Papers 7705, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Gordon M Phillips & Vojislav Maksimovic, 1999. "Do Conglomerate Firms Allocate Resources Inefficiently?," Working Papers 99-11, Center for Economic Studies, U.S. Census Bureau. [Downloadable!]
  7. Rotemberg, Julio J & Saloner, Garth, 1994. "Benefits of Narrow Business Strategies," American Economic Review, American Economic Association, vol. 84(5), pages 1330-49, December. [Downloadable!] (restricted)
  8. Raghuram Rajan & Henry Servaes & Luigi Zingales, . "The Cost of Diversity: The Diversification Discount and Inefficient Investment," CRSP working papers 463, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    Other versions:
  9. Lamont, Owen, 1997. " Cash Flow and Investment: Evidence from Internal Capital Markets," Journal of Finance, American Finance Association, vol. 52(1), pages 83-109, March. [Downloadable!] (restricted)
  10. Toni M. Whited, 2001. "Is It Inefficient Investment that Causes the Diversification Discount?," Journal of Finance, American Finance Association, vol. 56(5), pages 1667-1691, October. [Downloadable!] (restricted)
  11. Servaes, Henri, 1996. " The Value of Diversification during the Conglomerate Merger Wave," Journal of Finance, American Finance Association, vol. 51(4), pages 1201-25, September. [Downloadable!] (restricted)
  12. David S. Scharfstein & Jeremy C. Stein, 2000. "The Dark Side of Internal Capital Markets: Divisional Rent-Seeking and Inefficient Investment," Journal of Finance, American Finance Association, vol. 55(6), pages 2537-2564, December. [Downloadable!] (restricted)
    Other versions:
  13. Karl Lins & Henri Servaes, 1999. "International Evidence on the Value of Corporate Diversification," Journal of Finance, American Finance Association, vol. 54(6), pages 2215-2239, December. [Downloadable!] (restricted)
  14. Axel Gautier & Florian Heider, 2001. "What Do Internal Capital Markets Do? Redistribution vs. Incentives," FMG Discussion Papers dp386, Financial Markets Group. [Downloadable!] (restricted)
    Other versions:
  15. Hyun-Han Shin & René M. Stulz, 1998. "Are Internal Capital Markets Efficient?," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 531-552, May. [Downloadable!] (restricted)
  16. Fluck, Zsuzsanna & Lynch, Anthony W, 1999. "Why Do Firms Merge and Then Divest? A Theory of Financial Synergy," Journal of Business, University of Chicago Press, vol. 72(3), pages 319-46, July. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, 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.)

  1. Axel Gautier & Florian Heider, 2002. "The Benefit and Cost of Winner Picking: Redistribution Vs Incentives," Bonn Econ Discussion Papers bgse31_2002, University of Bonn, Germany. [Downloadable!]
  2. Oliver Hart & Bengt Holmstrom, 2008. "A Theory of Firm Scope," NBER Working Papers 14613, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Christa Hainz, 2006. "Business Groups in Emerging Markets-Financial Control & Sequential Investment," William Davidson Institute Working Papers Series wp830, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  4. Hainz, Christa, 2004. "Business Groups in Emerging Markets - Substitutes for Missing Institutions," Discussion Papers in Economics 387, University of Munich, Department of Economics. [Downloadable!]
  5. Cestone, Giacinta & Fumagalli, Chiara, 2001. "Internal Capital Markets, Cross-Subsidization and Product Market Competition," CEPR Discussion Papers 2935, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  6. Holger Zemanek, 2004. "Investitions- und Finanzierungsverhalten Multinationaler Unternehmen," IWH Discussion Papers 197, Halle Institute for Economic Research. [Downloadable!]
  7. George J. Mailath & Volker Nocke & Andrew Postlewaite, 2002. "Business Strategy, Human Capital, and Managerial Incentives," PIER Working Paper Archive 03-018, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 23 Jun 2003. [Downloadable!]
    Other versions:
  8. Inderst, Roman & Mueller, Holger M & Muennich, Felix, 2006. "Financing a Portfolio of Projects," CEPR Discussion Papers 5711, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  9. Christa Hainz, 2006. "Business Groups in Emerging Markets - Financial Control and Sequential Investment," Discussion Papers 124, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
    Other versions:
  10. Diemo Dietrich & Achim Hauck, 2007. "Bank Lending, Bank Capital Regulation and Efficiency of Corporate Foreign Investment," IWH Discussion Papers 4-07, Halle Institute for Economic Research. [Downloadable!]
  11. GAUTIER, Axel & HAMADI, Malika, 2004. "Internal capital market efficiency of Belgian holding companies," CORE Discussion Papers 2004086, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
    Other versions:
  12. Felipe Balmaceda, 2002. "Corporate Diversification: Good for Some Bad for Others," Documentos de Trabajo 141, Centro de Economía Aplicada, Universidad de Chile. [Downloadable!]
  13. Antoine Renucci, 2008. "Access to financing, rents, and organization of the firm," Post-Print halshs-00365983_v1, HAL. [Downloadable!]
  14. Wendy Carlin & Andrew Charlton & Colin Mayer, 2008. "Multinational Ownership and Subsidiary Investment," OFRC Working Papers Series 2008fe05, Oxford Financial Research Centre. [Downloadable!]
  15. Axel GAUTIER & Florian HEIDER, 2001. "What do internal capital markets do ? Redistribution vs. incentives," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2001015, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES). [Downloadable!]
    Other versions:
  16. Diemo Dietrich & Uwe Vollmer, 2006. "Banks’ Internationalization Strategies: The Role of Bank Capital Regulation," IWH Discussion Papers 18-06, Halle Institute for Economic Research. [Downloadable!]
  17. Giacinta Cestone & Chiara Fumagalli, 2003. "Winner-Picking or Cross-Subsidization? The Strategic Impact of Resource Flexibility in Business Groups," CSEF Working Papers 93, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
  18. GAUTIER, Axel & WAUTHY, Xavier, 2004. "Teaching versus rechearch : a multi-tasking approach to multi-department univerities," CORE Discussion Papers 2004003, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
  19. Diemo Dietrich, 2006. "Asset tangibility and capital allocation within multinational corporations," IWH Discussion Papers 4-06, Halle Institute for Economic Research. [Downloadable!]
  20. Brusco, Sandro & Panunzi, Fausto, 2002. "Reallocation of Corporate Resources and Managerial Incentives in Internal Capital Markets," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
Statistics
Access and download statistics

Did you know? LogEc provides statistical analysis about downloads from this service (and others).

This page was last updated on 2009-11-25.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.