Reallocation of corporate resources and managerial incentives in internal capital markets

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractDiversified firms often trade at a discount with respect to their focused counterparts. The literature has tried to explain the apparent misallocation of resources with lobbying activities or power struggles. We show that diversification can destroy value even when resources are efficiently allocated ex post. When managers derive utility from the funds under their purview, moving funds across divisions may diminish their incentives. The ex ante reduction in managerial incentives can more than offset the increase in firm value due to the ex post efficient reallocation of funds. This effect is robust to the introduction of monetary incentives. We apply our model to the analysis of the optimal reallocation policy and to the effect of the asymmetry among divisions. In general it is optimal for headquarters to commit not to reallocate at least a fraction of funds. As a result, the investment in a given division is more sensitive to the division's cash flow than to other divisions' cash flow. Asymmetries in size and growth prospects increase the diversification discount.JEL Classification: D2, L1, L2.

Teaching versus research: A multi-tasking approach to multi-department universities

“…This literature considers that divisions are in charge of only one task. Brusco and Panunzi (2005) and Gautier and Heider (2002) consider the case where divisional managers exert efforts to raise funds for investment while the quality of the investment projects is given. They show that the redistribution of funds reduces incentives to exert effort in the fund raising activity.…”

Taxing multinationals in the presence of internal capital markets

“…Internal capital markets and their disincentive effects are central to the corporate finance literature (e.g., Stein, 1997, Scharfstein and Stein, 2000, Brusco and Panunzi, 2005, and Inderst and Laux, 2005. The argument is that internal capital markets ensure an efficient allocation of resources across divisions.…”

“…MNE in order to gain a competitive advantage in the product market. 6 Bucovetsky and Haufler (2008) analyze the tax-sensitivity of the decision to set up a multinational firm structure that allows for tax savings through profit shifting. What sets this paper apart from previous ones is that it takes into account the aspect of corporate choice of the extensive and intensive margin of internal capital markets and considers how the organizational choice relates to government 5 For an excellent survey of the theoretical and empirical literature on internal capital markets, see Gertner and Scharfstein (2013).…”

A Theory of Firm Scope

“…First, there is an overlap with the literature on internal capital markets; see particularly Stein (1997Stein ( , 2002, Scharfstein and Stein (2000), Rajan et al (2000), Brusco and Panunzi (2005), and Inderst and Laux (2005). This literature emphasizes the idea that the boss of a conglomerate firm, even if she is an empire builder, is interested in the overall profit of the conglomerate, rather than the profits of any particular division.…”