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Opening the Black Box: Internal Capital Markets and Managerial Power

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  • Glaser, Markus
  • Lopez-de-Silanes, Florencio
  • Sautner, Zacharias

Abstract

We analyze the internal capital markets of a multinational conglomerate to determine whether more powerful unit managers enjoy larger allocations. We use a new dataset of planned and actual allocations to business units to show that, although all unit managers systematically over-budget capital expenditures, more powerful and better connected managers obtain larger shares of cash windfalls and increase investment about 40% more than their less powerful peers. Results survive robustness tests and are not explained by differences in managerial abilities or an endogenous allocation of managers across units. Our findings support bargaining-power theories and provide direct evidence of a source of capital allocation frictions.

Suggested Citation

  • Glaser, Markus & Lopez-de-Silanes, Florencio & Sautner, Zacharias, 2010. "Opening the Black Box: Internal Capital Markets and Managerial Power," MPRA Paper 28488, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:28488
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    Cited by:

    1. Igor Gurkov, 2015. "Russian Manufacturing Subsidiaries of Western Multinational Corporations: Support from Parents and Cooperation with Sister-Subsidiaries," HSE Working papers WP BRP 37/MAN/2015, National Research University Higher School of Economics.
    2. Graham, John R. & Harvey, Campbell R. & Puri, Manju, 2015. "Capital allocation and delegation of decision-making authority within firms," Journal of Financial Economics, Elsevier, vol. 115(3), pages 449-470.
    3. MIYAJIMA Hideaki & OGAWA Ryo & USHIJIMA Tatsuo, 2017. "Are Smaller (Larger) Corporate Headquarters Better?," Discussion papers 17004, Research Institute of Economy, Trade and Industry (RIETI).
    4. Koethenbuerger, Marko & Stimmelmayr, Michael, 2016. "Taxing multinationals in the presence of internal capital markets," Journal of Public Economics, Elsevier, vol. 138(C), pages 58-71.
    5. Hoang, Daniel & Gatzer, Sebastian & Ruckes, Martin E., 2018. "The economics of capital allocation in firms: Evidence from internal capital markets," Working Paper Series in Economics 115, Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering.
    6. Aivazian, Varouj A. & Qiu, Jiaping & Rahaman, Mohammad M., 2015. "Bank loan contracting and corporate diversification: Does organizational structure matter to lenders?," Journal of Financial Intermediation, Elsevier, vol. 24(2), pages 252-282.
    7. Glaser, Markus & Riepe, Jan, 2014. "Internal capital market studies in empirical banking: Biases due to usage of assets instead of risk capital?," Finance Research Letters, Elsevier, vol. 11(1), pages 47-53.
    8. Gatzer, Sebastian & Hoang, Daniel & Ruckes, Martin, 2015. "Internal Capital Markets and Diversified Firms: Theory and Practice," EconStor Preprints 169432, ZBW - German National Library of Economics.
    9. Klepsch, Catharina & Elsas, Ralf, 2016. "How and when do firms adjust their investments toward targets?," Annual Conference 2016 (Augsburg): Demographic Change 145486, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

    Internal Capital Markets; Corporate Investment; Capital Budgeting; Managerial Power; Agency; Influence Activities; Corporate Politics;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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