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Opening the Black Box: Internal Capital Markets and Managerial PowerMarkus GlaserLudwig-Maximilians-Universität Munich - Faculty of Business Administration (Munich School of Management) Florencio Lopez de SilanesEDHEC Business School; National Bureau of Economic Research (NBER); Tinbergen Institute Zacharias SautnerUniversity of Amsterdam - University of Amsterdam Business School; Duisenberg School of Finance; Tinbergen Institute March 7, 2013 Journal of Finance, Forthcoming EFA 2007 Ljubljana Meetings Paper AFA 2009 San Francisco Meetings Paper Abstract: 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 working papers seriesDate posted: March 25, 2008 ; Last revised: March 8, 2013Suggested CitationContact Information
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