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Internal Capital Allocation and Firm Performance

49 Pages Posted: 22 Mar 2009 Last revised: 18 Mar 2010

Ilan Guedj

Bates White, LLC

Jennifer C. Huang

University of Texas at Austin - Department of Finance

Johan Sulaeman

National University of Singapore (NUS) - Department of Finance

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Date Written: October 9, 2009

Abstract

We introduce a novel concept of the activeness of internal capital allocations across industries. We derive a measure of this activeness and use it to compare the performance of firms with different capital allocation styles. We find that firms that actively change their capital allocation across industries have a lower average industry-adjusted profitability than firms that follow passive strategies. Moreover, we find that active firms obtain lower valuation and lower excess stock returns in subsequent periods. Our findings suggest that conglomerate firms that actively allocate resources across industries do not do so efficiently, and that the stock market does not fully incorporate the information revealed through the internal capital allocation process.

Keywords: internal capital allocation, firm performance, stock return

JEL Classification: G31, L25

Suggested Citation

Guedj, Ilan and Huang, Jennifer C. and Sulaeman, Johan, Internal Capital Allocation and Firm Performance (October 9, 2009). Available at SSRN: https://ssrn.com/abstract=1364924 or http://dx.doi.org/10.2139/ssrn.1364924

Ilan Guedj

Bates White, LLC ( email )

2001 K St., NW
Suite 700
Washington, DC 20006
United States

HOME PAGE: http://www.bateswhite.com/professionals-Ilan-Guedj.html

Jennifer Chunyan Huang (Contact Author)

University of Texas at Austin - Department of Finance ( email )

McCombs School of Business, B6600
Austin, TX 78712
United States
512-232-9375 (Phone)
512-471-5073 (Fax)

Johan Sulaeman

National University of Singapore (NUS) - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://sites.google.com/site/johansulaeman/

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