Internal Capital Markets and the Competition for Corporate Resources
43 Pages Posted: 15 Sep 2000 Last revised: 17 Mar 2008
Date Written: May 1995
This paper examines the role of corporate headquarters in allocating scarce resources to competing projects in an internal capital market. Unlike a bank lender, headquarters has control rights that give it both the authority and the incentive to engage in 'winner-picking' -- the practice of actively shifting funds from one project to another. By doing a good job in the winner-picking dimension, headquarters can create value even when its own relationship with the outside capital market is fraught with agency problems and it therefore cannot help at all to relax overall firm- wide credit constraints. One implication of the model developed here is that internal capital markets may function more efficiently when companies choose relatively focused strategies.
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