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Internal Capital Markets and the Competition for Corporate Resources

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  • Jeremy C. Stein

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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Bibliographic Info

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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Publication status: published as Journal of Finance, vol.52, no.1, March 1997, pp.111-133.
Handle: RePEc:nbr:nberwo:5101

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