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A q Theory of Internal Capital Markets

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  • Min Dai
  • Xavier Giroud
  • Wei Jiang
  • Neng Wang

Abstract

We propose a tractable model of dynamic investment, spinoffs, financing, and risk management for a multi-division firm facing costly external finance. Our main results are: (1) within-firm resource allocation is based not only on the divisions’ productivity—as in “winner picking” models—but also their risk; (2) firms may voluntarily spin off productive divisions to increase liquidity; (3) diversification can reduce firm value in low-liquidity states; (4) corporate socialism makes liquidity less valuable; (5) division investment is determined by the ratio between marginal q and marginal value of cash. We further generalize our model to account for capital redeployability, M&As, and managerial entrenchment.

Suggested Citation

  • Min Dai & Xavier Giroud & Wei Jiang & Neng Wang, 2020. "A q Theory of Internal Capital Markets," NBER Working Papers 27931, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:27931
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    More about this item

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G3 - Financial Economics - - Corporate Finance and Governance
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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