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Internal capital markets and diversified firms: Theory and practice

Listed author(s):
  • Gatzer, Sebastian
  • Hoang, Daniel
  • Ruckes, Martin
Registered author(s):

    We analyze a unique dataset from a survey of CFOs of diversified firms to examine four areas of diversification and internal capital markets: causes and financing effects of corporate diversification, capital budgeting processes, capital investment methods, and reallocation policies in internal capital markets. CFOs see the main financial benefits of being diversified in lower costs of capital and higher debt capacities. Challenging the usual bottom-up view on capital allocation, firms' capital budgeting processes have typically also a top-down component: while top management relies on financial projections provided by divisions it also uses its own qualitative information. Top management is aware of agency and information problems at the divisional level and organizes the budgeting process to counteract managerial opportunism. Firms acknowledge that capital allocation decisions can frequently lead to a more evenly distributed allocation than pure financial criteria suggest.

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    File URL: https://www.econstor.eu/bitstream/10419/104706/1/810608103.pdf
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    Paper provided by Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering in its series Working Paper Series in Economics with number 64.

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    Date of creation: 2014
    Handle: RePEc:zbw:kitwps:64
    Contact details of provider: Web page: http://www.wiwi.kit.edu/

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    10. Rick Antle & Gary D. Eppen, 1985. "Capital Rationing and Organizational Slack in Capital Budgeting," Management Science, INFORMS, vol. 31(2), pages 163-174, February.
    11. Anand Mohan Goel, 2004. "Career Concerns and Resource Allocation in Conglomerates," Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 99-128.
    12. Harris, Milton & Raviv, Artur, 1996. " The Capital Budgeting Process: Incentives and Information," Journal of Finance, American Finance Association, vol. 51(4), pages 1139-1174, September.
    13. H. Martin Weingartner, 1969. "Some New Views on the Payback Period and Capital Budgeting Decisions," Management Science, INFORMS, vol. 15(12), pages 594-607, August.
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