Information Asymmetry, Budget Constraints, and Efficiency and Profitability of Internal Capital Markets
33 Pages Posted: 2 Sep 2003
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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Tobin's Q, Corporate Diversification and Firm Performance
By Larry H.p. Lang and René M. Stulz
-
The Cost of Diversity: The Diversification Discount and Inefficient Investment
By Raghuram G. Rajan, Henri Servaes, ...
-
The Cost of Diversity: The Diversification Discount and Inefficient Investment
By Raghuram G. Rajan, Henri Servaes, ...
-
Cash Flow and Investment: Evidence from Internal Capital Markets
-
The Dark Side of Internal Capital Markets: Divisional Rent-Seeking and Inefficient Investment
-
Internal Capital Markets and the Competition for Corporate Resources
-
Explaining the Diversification Discount
By José Manuel Campa and Simi Kedia
-
Explaining the Diversification Discount
By José Manuel Campa and Simi Kedia