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Internal Capital Markets and the Competition for Corporate Resources

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Author Info
Jeremy C. Stein

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Abstract

This paper examines the role of corporate headquarters in allocating scarce resources to competing projects in an internal capital market. Unlike a bank lender, headquarters has control rights that give it both the authority and the incentive to engage in 'winner-picking' -- the practice of actively shifting funds from one project to another. By doing a good job in the winner-picking dimension, headquarters can create value even when its own relationship with the outside capital market is fraught with agency problems and it therefore cannot help at all to relax overall firm- wide credit constraints. One implication of the model developed here is that internal capital markets may function more efficiently when companies choose relatively focused strategies.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5101.

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Date of creation: May 1995
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Handle: RePEc:nbr:nberwo:5101

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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. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-64, October. [Downloadable!] (restricted)
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  2. Morck, Randall & Shleifer, Andrei & Vishny, Robert W, 1990. " Do Managerial Objectives Drive Bad Acquisitions?," Journal of Finance, American Finance Association, vol. 45(1), pages 31-48, March. [Downloadable!] (restricted)
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  3. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December. [Downloadable!] (restricted)
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  4. Philippe Aghion & Jean Tirole, 1994. "Formal and Real Authority in Organizations," Working papers 95-8, Massachusetts Institute of Technology (MIT), Department of Economics.
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  5. 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)
  6. Andrei Shleifer, 1985. "A Theory of Yardstick Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(3), pages 319-327, Autumn. [Downloadable!] (restricted)
  7. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Blackwell Publishing, vol. 51(3), pages 393-414, July. [Downloadable!] (restricted)
  8. Jensen, Michael C, 1993. " The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems," Journal of Finance, American Finance Association, vol. 48(3), pages 831-80, July. [Downloadable!] (restricted)
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  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. [Downloadable!] (restricted)
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  10. Kaplan, Steven N & Weisbach, Michael S, 1992. " The Success of Acquisitions: Evidence from Divestitures," Journal of Finance, American Finance Association, vol. 47(1), pages 107-38, March. [Downloadable!] (restricted)
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  11. Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(1991-2), pages 205-248. [Downloadable!]
  12. Comment, Robert & Jarrell, Gregg A., 1995. "Corporate focus and stock returns," Journal of Financial Economics, Elsevier, vol. 37(1), pages 67-87, January. [Downloadable!] (restricted)
  13. Barry J. Nalebuff & Joseph E. Stiglitz, 1983. "Prices and Incentives: Towards a General Theory of Compensation and Competition," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 21-43, Spring. [Downloadable!] (restricted)
  14. Boyd, John H. & Prescott, Edward C., 1986. "Financial intermediary-coalitions," Journal of Economic Theory, Elsevier, vol. 38(2), pages 211-232, April. [Downloadable!] (restricted)
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  15. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August. [Downloadable!] (restricted)
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  16. Scharfstein, David S & Stein, Jeremy C, 1990. "Herd Behavior and Investment," American Economic Review, American Economic Association, vol. 80(3), pages 465-79, June.
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  17. Stewart C. Myers, 1993. "Still Searching For Optimal Capital Structure," Journal of Applied Corporate Finance, Morgan Stanley, vol. 6(1), pages 4-14. [Downloadable!] (restricted)
  18. Berger, Philip G. & Ofek, Eli, 1995. "Diversification's effect on firm value," Journal of Financial Economics, Elsevier, vol. 37(1), pages 39-65, January. [Downloadable!] (restricted)
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