Compensation Incentive of CEO and Internal Capital Market Allocation Efficiency

Abstract

In the agency theory of internal capital market, the compensation incentive of Headquarters is discussed as a key factor to the efficiency of internal capital market, using KKT. Assumed that equity incentive and investment incentive are Headquarters’ compensation body, investments in divisions are decided by the comparison between equity incentive and investment incentive, the comparison results in internal capital market “Socialism”. Furthermore, for the maximum of equity incentive and investment incentive, Headquarters prefers to overinvestment in divisions.