Corporate Focusing and Internal Capital Markets

Making Capital Markets Work through Corporate Governance

Hedge Fund Activism and Internal Capital Markets∗

This paper studies the effects of hedge fund activism on the activity and efficiency of target companies’ internal capital markets. I find that firms targeted by activist hedge funds significantly increase investment cross-subsidies between divisions, predominantly by enhancing the efficiency of their internal resource allocations. Following Schedule 13D filings by activist hedge funds, segment...

Optimal Design of Internal Capital Markets

This paper studies optimal design of a capital allocation system in a …rm in which the division manager with empire-building preferences privately observes the arrival and properties of investment projects, and the headquarters is able to audit each project at a cost. Under certain conditions, the optimal system takes the form of a budgeting mechanism with threshold division of authority. Speci...

Internal Capital Markets in Business Groups

Business groups are important in many countries. Several studies have looked at the performance and behavior of firms that are members of a business group. This paper looks at the issue in more detail and tries to answer some related questions. First, do business groups really have internal capital markets and do they provide efficient resource allocation (in a view of the controlling sharehold...

A Theory of Socialistic Internal Capital Markets

We develop a model of a two-division firm in which the “strong” division has,on average, higher quality investment projects than the “weak” division. We show that the firm optimally biases its project selection policy in favor of the weak division and this bias is stronger when there is a greater spread in average project quality. The cost of such a policy is that the firm sometimes funds an in...