Incentives in Internal Capital Markets: Capital Constraints, Competition, and Investment Opportunities
University of Frankfurt; Imperial College London
Vienna University of Economics and Business Administration
EFA 2002 Berlin Meetings Presented Paper
This paper considers the effect of competition for scarce financial resources on managers' incentives to generate profitable investment opportunities. Competition is only unambiguously beneficial if projects are symmetric. If divisions differ in their cash endowments or their growth potential, integration may reduce incentives for some managers, which may lower total firm value. Moreover, relaxing capital constraints, e.g., by integrating a cash cow project, may reduce incentives.
We treat two different scenarios where contracts can either only specify monetary incentives or additionally the allocation of funds. While distorted capital allocations increase managers' incentives, they only survive renegotiations in integrated firms.
Number of Pages in PDF File: 37
Keywords: capital allocation, conglomerate discount
JEL Classification: G31, G34, J33working papers series
Date posted: February 2, 2001
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo8 in 0.844 seconds