Managerial Incentives and Internal Capital Markets

Posted: 4 Oct 2003

See all articles by Adolfo de Motta

Adolfo de Motta

McGill University - Desautels Faculty of Management

Abstract

Capital budgeting in multidivisional firms depends on the external assessment of the whole firm, as well as on headquarters' assessment of the divisions. While corporate headquarters may create value by directly monitoring divisions, the external assessment of the firm is a public good for division managers who, consequently, are tempted to free ride. As the number of divisions increases, the free-rider problem is aggravated, and internal capital markets substitute for external capital markets in the provision of managerial incentives. The analysis relates the value of diversification to characteristics of the firm, the industry, and the capital market.

Suggested Citation

de Motta, Adolfo, Managerial Incentives and Internal Capital Markets. Available at SSRN: https://ssrn.com/abstract=411142

Adolfo De Motta (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

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