Divisional Managers and Internal Capital Markets
University of Washington - Michael G. Foster School of Business
University of Michigan - The Stephen M. Ross School of Business
September 9, 2012
Journal of Finance, Forthcoming
Ross School of Business Paper No. 1144
Using hand-collected data on divisional managers at S&P 500 firms, we study their role in internal capital budgeting. Divisional managers with social connections to the CEO receive more capital. Connections to the CEO outweigh measures of managers’ formal influence, such as seniority and board membership, and affect both managerial appointments and capital allocations. The effect of connections on investment efficiency depends on the tradeoff between agency and information asymmetry. Under weak governance, connections reduce investment efficiency and firm value via favoritism. Under high information asymmetry, connections increase efficiency and value via information transfer.
Number of Pages in PDF File: 62
Keywords: diversification, conglomerates, social networks, agency, information asymmetry, capital budgeting, internal capital markets
JEL Classification: G31, G32working papers series
Date posted: May 11, 2010 ; Last revised: September 11, 2012
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