A q Theory of Internal Capital Markets

61 Pages Posted: 9 Dec 2020

See all articles by Min Dai

Min Dai

National University of Singapore

Xavier Giroud

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Wei Jiang

Hong Kong University of Science and Technology

Neng Wang

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Asian Bureau of Finance and Economic Research (ABFER)

Multiple version iconThere are 3 versions of this paper

Date Written: October 2, 2020

Abstract

We propose a tractable model of dynamic investment, division sales (spinoffs), financing, and risk management for a multi-division firm that faces costly external finance. The model highlights the importance of considering the intertwined nature of the different policies. Our main results are as follows: (1) risk management considerations prescribe the allocation of resources based not only on the divisions' productivity — as in standard models of ''winner picking'' — but also their risk; (2) firms may choose to voluntarily spin off productive divisions to increase liquidity; (3) diversification can reduce firm value especially in low liquidity states, as it increases the cost of a spinoff and hampers liquidity management; (4) with corporate socialism, liquidity is less valuable since it is less costly to replenish the firm's liquidity through a spinoff; and (5) division-level investment is set such that the ratio between marginal q and the marginal cost of investing in each division equals the marginal value of cash.

Keywords: internal capital markets, risk management, cash management, financing constraints, spinoff

JEL Classification: D92, G3, L25

Suggested Citation

Dai, Min and Giroud, Xavier and Jiang, Wei and Wang, Neng, A q Theory of Internal Capital Markets (October 2, 2020). Available at SSRN: https://ssrn.com/abstract=3704072 or http://dx.doi.org/10.2139/ssrn.3704072

Min Dai

National University of Singapore ( email )

Singapore

Xavier Giroud (Contact Author)

Columbia Business School - Finance and Economics ( email )

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New York, NY 10027
United States

HOME PAGE: http://www.columbia.edu/~xg2285/

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Wei Jiang

Hong Kong University of Science and Technology ( email )

Clear water bay
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Hong Kong
China

Neng Wang

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER) ( email )

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Asian Bureau of Finance and Economic Research (ABFER) ( email )

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