The Efficiency of Internal Capital Markets: Evidence from the Annual Capital Expenditure Survey
40 Pages Posted: 18 Mar 2008 Last revised: 10 Oct 2012
Date Written: April 1, 2008
We empirically examine whether greater firm diversity results in the inefficient allocation of capital. Using both COMPUSTAT and the Annual Capital Expenditure Survey (ACES) we find firm diversity to be negatively related to the efficiency of investment. However once we distinguish between capital expenditure for structures and equipment, we find that while firms do inefficiently allocate capital for equipment, they efficiently allocate capital for structures. These results suggest that when the decision will have long-lasting repercussions, headquarters will, more often than not, make the correct choice.
Keywords: Internal Capital Allocation, Diversified Firm, Investment
JEL Classification: D2, G3, L2
Suggested Citation: Suggested Citation