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A q$q$ Theory of Internal Capital Markets

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  • MIN DAI
  • XAVIER GIROUD
  • WEI JIANG
  • NENG WANG

Abstract

We propose a tractable model of dynamic investment, spinoffs, financing, and risk management for a multidivision firm facing costly external finance. Our analysis formalizes the following insights: (i) Within‐firm resource allocation is based not only on divisions' productivity, as in winner‐picking models, but also their risk; (ii) firms may voluntarily spin off productive divisions to increase liquidity; (iii) diversification can reduce firm value in low‐liquidity states, as it increases the spinoff cost and hampers liquidity management; (iv) corporate socialism makes liquidity less valuable; and (v) division investment is determined by the ratio between marginal q$q$ and marginal value of cash.

Suggested Citation

  • Min Dai & Xavier Giroud & Wei Jiang & Neng Wang, 2024. "A q$q$ Theory of Internal Capital Markets," Journal of Finance, American Finance Association, vol. 79(2), pages 1147-1197, April.
    • Handle: RePEc:bla:jfinan:v:79:y:2024:i:2:p:1147-1197
    DOI: 10.1111/jofi.13318
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