Internal Capital Markets and the Competition for Corporate Resources

J. OF FINANCE, Vol. 52 No. 1, March 1997

Posted: 20 Jan 1997

See all articles by Jeremy C. Stein

Jeremy C. Stein

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

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Abstract

This paper examines the role of corporate headquarters in allocating scarce resources to competing projects in an internal capital market. Unlike a bank, headquarters has control rights that enable it to engage in "winner-picking"- -the practice of actively shifting funds from one project to another. By doing a good job in the winner-picking dimension, headquarters can create value even when it cannot help at all to relax overall firm-wide credit constraints. The model implies that internal capital markets may sometimes function more efficiently when headquarters oversees a small and focused set of projects.

JEL Classification: G31

Suggested Citation

Stein, Jeremy C., Internal Capital Markets and the Competition for Corporate Resources. J. OF FINANCE, Vol. 52 No. 1, March 1997. Available at SSRN: https://ssrn.com/abstract=8050

Jeremy C. Stein (Contact Author)

Harvard University - Department of Economics ( email )

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HOME PAGE: http://post.economics.harvard.edu/faculty/stein/stein.html

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