A theory of socialistic internal capital markets
Research output: Journal Publications and Reviews (RGC: 21, 22, 62) › 21_Publication in refereed journal
Related Research Unit(s)
|Journal / Publication||Journal of Financial Economics|
|Publication status||Published - Jun 2006|
|Link to Scopus||https://www.scopus.com/record/display.uri?eid=2-s2.0-33646527163&origin=recordpage|
We develop a model of a two-division firm in which the "strong" division has, on average, higher quality investment opportunities than the "weak" division. We show that, in the presence of agency and information problems, optimal effort incentives are less powerful and thus managerial effort is lower in the strong division. This leads the firm to bias its project selection policy against the strong division. The selection bias is more severe when there is a larger spread in the average quality of investment opportunities between the two divisions. © 2006 Elsevier B.V. All rights reserved.
- Capital budgeting, Internal capital markets, Investment policy