Information Asymmetry, Budget Constraints, and Efficiency and Profitability of Internal Capital Markets

33 Pages Posted: 2 Sep 2003

See all articles by Xiangkang Yin

Xiangkang Yin

Deakin University; Financial Research Network (FIRN)

Abstract

This paper is inspired by three empirical findings: (i) Conglomerates are traded at an average discount; (ii) Plants in conglomerates are more productive than plants in comparable single-segment firms; (iii) Employees in conglomerates are paid higher. The paper develops a model demonstrating that the internal capital markets of conglomerates can ease budget constraints but at the same time provide project managers with more incentives to manipulate investment information. Because they have to pay higher information rents to managers, conglomerates are likely to be less profitable than comparable single-segment firms although they are more efficient in resource allocation.

Keywords: Internal capital market, conglomerate, efficient resource allocation, profitability

JEL Classification: G30, G32

Suggested Citation

Yin, Xiangkang, Information Asymmetry, Budget Constraints, and Efficiency and Profitability of Internal Capital Markets. Available at SSRN: https://ssrn.com/abstract=425662 or http://dx.doi.org/10.2139/ssrn.425662

Xiangkang Yin (Contact Author)

Deakin University ( email )

Melbourne, Victoria
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Register to save articles to
your library

Register

Paper statistics

Downloads
265
rank
113,028
Abstract Views
1,202
PlumX Metrics
!

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information