Abstract

http://ssrn.com/abstract=683727
 
 

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A Theory of Socialistic Internal Capital Markets


Antonio E. Bernardo


University of California, Los Angeles (UCLA) - Finance Area

Jiang Luo


Hong Kong University of Science & Technology - Department of Finance

James J. D. Wang


City University of Hong Kong (CityUHK) - Department of Economics & Finance

January 21, 2005

AFA 2006 Boston Meetings Paper

Abstract:     
We develop a model of a two-division firm in which the strong division has, on average, higher quality investment projects than the weak division. We show that the firm optimally biases its project selection policy in favor of the weak division and this bias is stronger when there is a greater spread in average project quality. The cost of such a policy is that the firm sometimes funds an inferior project but the benefit is that it motivates the manager of the strong division to set (and meet) more aggressive cash flow targets.

Number of Pages in PDF File: 39

Keywords: Internal capital markets, conglomerates, project selection

JEL Classification: G31

working papers series





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Date posted: March 25, 2005  

Suggested Citation

Bernardo, Antonio E. and Luo, Jiang and Wang, James J. D., A Theory of Socialistic Internal Capital Markets (January 21, 2005). AFA 2006 Boston Meetings Paper. Available at SSRN: http://ssrn.com/abstract=683727 or http://dx.doi.org/10.2139/ssrn.683727

Contact Information

Antonio E. Bernardo
University of California, Los Angeles (UCLA) - Finance Area ( email )
Los Angeles, CA 90095-1481
United States
310-825-2198 (Phone)
310-206-5455 (Fax)
Jiang Luo
Hong Kong University of Science & Technology - Department of Finance ( email )
Clear Water Bay, Kowloon
Hong Kong
James J. D. Wang (Contact Author)
City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )
83 Tat Chee Avenue
Kowloon
Hong Kong
+85 2 2788 8814 (Phone)
+85 2 2788 8806 (Fax)
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