Opening the Black Box: Internal Capital Markets and Managerial Power
Ludwig-Maximilians-Universität München - Faculty of Business Administration (Munich School of Management)
Florencio Lopez de Silanes
EDHEC Business School; National Bureau of Economic Research (NBER)
Frankfurt School of Finance & Management gemeinnützige GmbH
March 7, 2013
Journal of Finance 68, 2013, 1577-1631
EFA 2007 Ljubljana Meetings Paper
AFA 2009 San Francisco Meetings Paper
We analyze the internal capital markets of a multinational conglomerate, using a unique panel data set of planned and actual allocations to business units and a survey of unit CEOs. Following cash windfalls, more powerful managers obtain larger allocations and increase investment substantially more than their less connected peers. We identify cash windfalls as a source of misallocation of capital, as more powerful managers overinvest and their units exhibit lower ex-post performance and productivity. These findings contribute to our understanding of frictions in resource allocation within firms and point to an important channel through which power may lead to inefficiencies.
Number of Pages in PDF File: 112
Keywords: Internal Capital Markets, Capital Budgeting, Managerial Power, Corporate Politics
JEL Classification: D80, G31, G34, L25
Date posted: March 25, 2008 ; Last revised: January 30, 2015
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