Managerial Discretion and Efficiency of Internal Capital Markets
42 Pages Posted: 7 Nov 2018 Last revised: 28 Apr 2019
Date Written: April 2019
This paper uses the staggered adoption of state-level antitakeover laws to provide causal evidence on whether managerial agency problems affect the allocative efficiency of conglomerate firms. Increases in control slack lead to sharp declines in the Q-sensitivity of investment. The effects are more pronounced for conglomerate firms under stronger pressure from the corporate control market prior to the adoption of antitakeover laws as well as for conglomerate firms with greater financial slack, dispersion of ownership, and diversity of investment opportunities. Our findings establish a novel organizational channel through which takeover threats impact the efficiency of resource allocation in the economy.
Keywords: internal capital markets, antitakeover laws, corporate investment, allocation of resources, agency problems
JEL Classification: D21, D23, G31, G34, G38, K22, L51
Suggested Citation: Suggested Citation