Managerial Political Power and Reallocation of Value in the Internal Capital Market

Abstract

We examine how managers’ political power reallocates value across divisions in the internal capital market. By shifting the focus from financial to firm-specific non-financial resources that are difficult to evaluate and zero-sum in nature, we revise the prevailing view that a manager’s political power plays a significant yet contingent role only under financial constraint and weak governance. We instead characterize it as an intrinsic, inescapable determinant of how value is allocated in the internal capital market. We test our argument in the context of the corruption trials against a key executive at Samsung business group. By parsing each sentence of the legal opinion delivered during these trials, we identify a series of high-frequency shocks that unfold over the course of minutes and show that the loss of one manager’s political power can transfer resources and value to other divisions. This study presents a politics-based theory of internal value reallocation and highlights the methodological potential of using a quantitative case study that combines high-frequency stock market data with a detailed qualitative analysis to generate and test a new theory.

Keywords: Political Power, Internal Capital Market, Business Groups

JEL Classification: G31; G34