Does Internal Capital Market Affiliation Matter for Capital Allocation? An Empirical Analysis

40 Pages Posted: 10 Feb 2020

See all articles by Jorge H. F. Mota

Jorge H. F. Mota

University of Aveiro - Department of Economics, Management, Industrial Engineering and Tourism

Mário João Coutinho dos Santos

Catholic University of Portugal

Multiple version iconThere are 2 versions of this paper

Date Written: January 22, 2020

Abstract

The paper examines the capital allocative behavior of internal capital market (ICM) members and their comparable single-segment firms in the euro area. Results indicate that the ICM members exhibit lower relationship between investment and the availability of internal funds, lower impact of financial flexibility, and lower levels of underinvestment and overinvestment behavior, than their peers. Results document that headquarters’ monitoring and managerial discretion, cost of capital, financial flexibility, informational asymmetries and asset lumpiness appear to be significant determinants of investment behavior.

Keywords: capital allocation, investment-cash flow sensitivity, internal capital markets, financial flexibility, asset lumpiness

JEL Classification: C33, C81, D25, G31, L22

Suggested Citation

Mota, Jorge H. F. and Coutinho dos Santos, Mário João, Does Internal Capital Market Affiliation Matter for Capital Allocation? An Empirical Analysis (January 22, 2020). Available at SSRN: https://ssrn.com/abstract=3530191 or http://dx.doi.org/10.2139/ssrn.3530191

Jorge H. F. Mota (Contact Author)

University of Aveiro - Department of Economics, Management, Industrial Engineering and Tourism ( email )

Campus Universitário de Santiago
Aveiro, 3810-193
Portugal

Mário João Coutinho dos Santos

Catholic University of Portugal ( email )

Palma de Cima
Lisboa, 1649-023
Portugal

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