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Divisional Managers and Internal Capital Markets

61 Pages Posted: 11 May 2010 Last revised: 3 Oct 2013

Ran Duchin

University of Washington - Michael G. Foster School of Business

Denis Sosyura

Arizona State University

Date Written: October 1, 2013

Abstract

Using hand-collected data on divisional managers at S&P 500 firms, we study their role in internal capital budgeting. Divisional managers with social connections to the CEO receive more capital. Connections to the CEO outweigh measures of managers’ formal influence, such as seniority and board membership, and affect both managerial appointments and capital allocations. The effect of connections on investment efficiency depends on the tradeoff between agency and information asymmetry. Under weak governance, connections reduce investment efficiency and firm value via favoritism. Under high information asymmetry, connections increase efficiency and value via information transfer.

Keywords: diversification, conglomerates, social networks, agency, information asymmetry, capital budgeting, internal capital markets

JEL Classification: G31, G32

Suggested Citation

Duchin, Ran and Sosyura, Denis, Divisional Managers and Internal Capital Markets (October 1, 2013). Journal of Finance, Vol. 68, No. 2, 2013. Available at SSRN: https://ssrn.com/abstract=1603773 or http://dx.doi.org/10.2139/ssrn.1603773

Ran Duchin

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Denis Sosyura (Contact Author)

Arizona State University ( email )

Tempe, AZ 85287-3706
United States

HOME PAGE: http://www.public.asu.edu/~dsosyura/

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