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Managerial Incentives and Internal Capital Markets

Author

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  • Adolfo de Motta

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

  • Adolfo de Motta, 2003. "Managerial Incentives and Internal Capital Markets," Journal of Finance, American Finance Association, vol. 58(3), pages 1193-1220, June.
    • Handle: RePEc:bla:jfinan:v:58:y:2003:i:3:p:1193-1220
    DOI: 10.1111/1540-6261.00563
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    Citations

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    Cited by:

    1. Alexander Ljungqvist & Donghua Chen & Dequan Jiang & Haitian Lu & Mingming Zhou, 2015. "State Capitalism vs. Private Enterprise," NBER Working Papers 20930, National Bureau of Economic Research, Inc.
    2. Eisfeldt, Andrea L. & Rampini, Adriano A., 2008. "Managerial incentives, capital reallocation, and the business cycle," Journal of Financial Economics, Elsevier, vol. 87(1), pages 177-199, January.
    3. Brusco, Sandro & Panunzi, Fausto, 2005. "Reallocation of corporate resources and managerial incentives in internal capital markets," European Economic Review, Elsevier, vol. 49(3), pages 659-681, April.
    4. Richard Borghesi & Joel Houston & Andy Naranjo, 2007. "Value, Survival, and the Evolution of Firm Organizational Structure," Financial Management, Financial Management Association International, vol. 36(3), pages 5-31, September.
    5. Baule, Rainer, 2014. "Allocation of risk capital on an internal market," European Journal of Operational Research, Elsevier, vol. 234(1), pages 186-196.
    6. Choe, Chongwoo & Yin, Xiangkang, 2009. "Diversification discount, information rents, and internal capital markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(2), pages 178-196, May.
    7. Koethenbuerger, Marko & Stimmelmayr, Michael, 2016. "Taxing multinationals in the presence of internal capital markets," Journal of Public Economics, Elsevier, vol. 138(C), pages 58-71.
    8. Zhang, Dongyang, 2020. "How do firms overcome financial constraint anxiety to survive in the market? Evidence from large manufacturing data," International Review of Financial Analysis, Elsevier, vol. 70(C).
    9. Martinez Leonardo, 2009. "Reputation, Career Concerns, and Job Assignments," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-29, May.
    10. Wulf, Julie, 2009. "Influence and inefficiency in the internal capital market," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 305-321, October.
    11. Hoang, Daniel & Gatzer, Sebastian & Ruckes, Martin E., 2018. "The economics of capital allocation in firms: Evidence from internal capital markets," Working Paper Series in Economics 115, Karlsruhe Institute of Technology (KIT), Department of Economics and Management.
    12. Gatzer, Sebastian & Hoang, Daniel & Ruckes, Martin, 2015. "Internal Capital Markets and Diversified Firms: Theory and Practice," EconStor Preprints 169432, ZBW - Leibniz Information Centre for Economics.
    13. I-Ju Chen, 2016. "Corporate Governance and the Efficiency of Internal Capital Markets," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(02), pages 1-50, June.

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