Opening the Black Box: Internal Capital Markets and Managerial Power

112 Pages Posted: 25 Mar 2008 Last revised: 30 Jan 2015

See all articles by Markus Glaser

Markus Glaser

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Florencio Lopez de Silanes

SKEMA Business School; National Bureau of Economic Research (NBER)

Zacharias Sautner

Frankfurt School of Finance & Management gemeinnützige GmbH; European Corporate Governance Institute (ECGI)

Date Written: March 7, 2013

Abstract

We analyze the internal capital markets of a multinational conglomerate, using a unique panel data set of planned and actual allocations to business units and a survey of unit CEOs. Following cash windfalls, more powerful managers obtain larger allocations and increase investment substantially more than their less connected peers. We identify cash windfalls as a source of misallocation of capital, as more powerful managers overinvest and their units exhibit lower ex-post performance and productivity. These findings contribute to our understanding of frictions in resource allocation within firms and point to an important channel through which power may lead to inefficiencies.

Keywords: Internal Capital Markets, Capital Budgeting, Managerial Power, Corporate Politics

JEL Classification: D80, G31, G34, L25

Suggested Citation

Glaser, Markus and Lopez de Silanes, Florencio and Sautner, Zacharias, Opening the Black Box: Internal Capital Markets and Managerial Power (March 7, 2013). Journal of Finance 68, 2013, 1577-1631 ; EFA 2007 Ljubljana Meetings Paper; AFA 2009 San Francisco Meetings Paper. Available at SSRN: https://ssrn.com/abstract=966325 or http://dx.doi.org/10.2139/ssrn.966325

Markus Glaser (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Schackstraße 4
Munich, 80539
Germany

Florencio Lopez de Silanes

SKEMA Business School ( email )

Avenue Willy Brandt, Euralille
Lille, 59777
France

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Zacharias Sautner

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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