Evidence on the Dark Side of Internal Capital Markets

Review of Financial Studies (RFS), Forthcoming

Marshall School of Business Working Paper No. FBE 05-10

30 Pages Posted: 20 Nov 2009 Last revised: 23 Feb 2010

See all articles by Oguzhan Ozbas

Oguzhan Ozbas

University of Southern California - Marshall School of Business - Finance and Business Economics Department

David S. Scharfstein

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2009

Abstract

This paper documents differences between the Q-sensitivity of investment of stand-alone firms and unrelated segments of conglomerate firms. Unrelated segments exhibit lower Q-sensitivity of investment than stand-alone firms. This fact is driven by unrelated segments of conglomerate firms that tend to invest less than stand-alone firms in high-Q industries. This finding is robust to matching on industry, year, size, age and profitability. The differences are more pronounced in conglomerates in which top management has small ownership stakes, suggesting that agency problems explain the investment behavior of conglomerates.

Suggested Citation

Ozbas, Oguzhan and Scharfstein, David S., Evidence on the Dark Side of Internal Capital Markets (March 1, 2009). Review of Financial Studies (RFS), Forthcoming, Marshall School of Business Working Paper No. FBE 05-10, Available at SSRN: https://ssrn.com/abstract=1508769

Oguzhan Ozbas (Contact Author)

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States
213-740-0781 (Phone)
213-740-6650 (Fax)

David S. Scharfstein

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-496-5067 (Phone)
617-496-8443 (Fax)

HOME PAGE: http://www.people.hbs.edu/dscharfstein/

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