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Divisional Managers and Internal Capital Markets


Ran Duchin


University of Washington - Michael G. Foster School of Business

Denis Sosyura


University of Michigan, Stephen M. Ross School of Business

October 1, 2013

Journal of Finance, Vol. 68, No. 2, 2013

Abstract:     
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: 61

Keywords: diversification, conglomerates, social networks, agency, information asymmetry, capital budgeting, internal capital markets

JEL Classification: G31, G32

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Date posted: May 11, 2010 ; Last revised: October 3, 2013

Suggested Citation

Duchin, Ran and Sosyura, Denis, Divisional Managers and Internal Capital Markets (October 1, 2013). Journal of Finance, Vol. 68, No. 2, 2013. Available at SSRN: http://ssrn.com/abstract=1603773 or http://dx.doi.org/10.2139/ssrn.1603773

Contact Information

Ran Duchin
University of Washington - Michael G. Foster School of Business ( email )
Box 353200
Seattle, WA 98195-3200
United States
Denis Sosyura (Contact Author)
University of Michigan, Stephen M. Ross School of Business ( email )
701 Tappan Street
Ann Arbor, MI MI 48109
United States
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