A theory of socialistic internal capital markets

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journal

19 Scopus Citations
View graph of relations

Author(s)

Related Research Unit(s)

Detail(s)

Original languageEnglish
Pages (from-to)485-509
Journal / PublicationJournal of Financial Economics
Volume80
Issue number3
Publication statusPublished - Jun 2006

Abstract

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.

Research Area(s)

  • Capital budgeting, Internal capital markets, Investment policy

Citation Format(s)

A theory of socialistic internal capital markets. / Bernardo, Antonio E.; Luo, Jiang; Wang, James J.D.

In: Journal of Financial Economics, Vol. 80, No. 3, 06.2006, p. 485-509.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journal