technological specialization and the decline of diversified firms we document a strong decline in corporate diversification activity since the late 1970s and we develop a dynamic model that explains this pattern both qualitatively and quantitatively the key feature of the model is that synergies endogenously decline with technological specialization leading to fewer diversified firms in equilibrium the model further predicts that segments inside a conglomerate should become more related over time which is consistent with the data finally the calibrated model also matches other empirical magnitudes well output growth rate market to book ratios diversification discount frequency and returns of diversifying mergers and frequency of refocusing activity

how do nonprofits respond to negative wealth shocks the impact of the 2008 stock market collapse on hospitals the theory of cost shifting posits that nonprofit firms share the pain of negative financial shocks with their stakeholders for example by raising prices we examine how nonprofit hospitals responded to the sharp reductions in their assets caused by the 2008 stock market collapse the average hospital did not raise prices but hospitals with substantial market power did cost shift in this way we find no evidence that hospitals reduced treatment costs hospitals eliminated but left unchanged their offerings of profitable services taken together our results provide mixed evidence on whether nonprofits behave differently from for profits

formulating research policy on expert advice abstract national research assessments represent the principal policy used by countries with public university systems to improve the quality of their universities research they typically employ expert panels of local academics to assess journal quality and use such assessments to reward publications we propose a model of how experts assess quality and test this model using data from the recent australian assessment controlling for objective quality we show that experts cognitive biases dominate their assessments consequently such assessments exaggerate the quality of the experts research and understate that of their colleagues our model can explain 95 of the variation in assessments

does diversification destroy value evidence from the industry shocks does corporate diversification reduce shareholder value since firms endogenously choose to diversify exogenous variation in diversification is necessary to draw inferences about the causal effect we examine changes in the within firm dispersion of industry investment or diversity we find that exogenous changes in diversity due to changes in industry investment are negatively related to firm value thus diversification destroys value consistent with the inefficient internal capital markets hypothesis measurement error does not cause this finding we also find that exogenous changes in industry cash flow diversity are negatively related to firm value r 2002 elsevier science s a all rights reserved jel classification g34

the nature of diversified business groups a research design and two case studies diversified business groups dominate the private sectors of most of the world s economies several of these economies have undergone sudden policy changes that significantly increase domestic competitive intensity the authors demonstrate how the changes in corporate scope that accompany such competitive shocks can be used to weigh the importance of different explanations for the existence of diversified business groups the authors illustrate their reasoning by studying the restructuring of two of india s largest business groups following a comprehensive post 1991 package of policy reforms the case studies also elucidate aspects of the restructuring process that should inform larger sample empirical analyses copyright 1998 by blackwell publishing ltd

conglomerate investment under various capital market conditions abstract this paper studies the investment of diversified and focused firms under various capital market conditions when external capital becomes more costly at the aggregate level investment declines in focused firms but remains unchanged in diversified firms this investment advantage enjoyed by diversified firms could attribute to both their easy access to external capital and their ability to substitute internal capital markets for costly external markets consistent with the internal capital market argument our findings show that the investment advantage exists for diversified firms even after we control for their easy access to external markets we also find that the role of internal markets in financing investment is more important for diversified firms that are more financially constrained in external markets finally we find that the segment level investment becomes more efficient in conglomerates internal capital markets under depressed external capital market conditions overall our findings suggest that internal capital allocation functions as a valuable and efficient substitute for diversified firms in a tightened external capital market

strategic responses of incumbents to new entry the effect of ownership structure capital structure and focus we examine how certain firm and market specific characteristics affect incumbent firms responses to new entry into their local markets data comes from the discount department store industry where wal mart entered a large number of markets in a short period of time consistent with existing research larger and more profitable incumbents respond more aggressively to wal mart s entry while more highly levered incumbents respond less aggressively also there is evidence that incumbent managers fight harder possibly overinvest when their job is at greater risk and high managerial ownership appears to reduce this agency problem incumbent firms behave differently in markets under attack by wal mart than in markets not yet threatened suggesting that some of the documented responses are specific to walmart s entry article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

financial intermediary coalitions abstract in this article an environment in which the investment opportunities of agents are private information is studied and it is shown that financial intermediaries arise endogenously within that environment it is established that financial intermediaries are part of an efficient arrangement in the sense that they are needed to support the authors private information core allocations these intermediaries which are coalitions of agents exhibit the following characteristics in equilibrium they borrow from and lend to large groups of agents they produce information about investment projects and they issue claims that have different state contingent payoffs than claims issued by ultimate borrowers

how much of the diversification discount can be explained by poor corporate governance we investigate whether the diversification discount occurs partly as an artifact of poor corporate governance in panel data models we find that the discount narrows by 16 to 21 when we add governance variables as regression controls we also estimate heckman selection models that account for the endogeneity of diversification and dynamic panel generalized method of moments models that account for the endogeneity of both diversification and governance we find that the diversification discount persists even with these controls for endogeneity however in selection models the discount disappears entirely when we introduce governance variables in the second stage and in dynamic panel gmm models the discount narrows by 37 when we include governance variables

capital budgeting and delegation abstract as part of our ongoing research into capital budgeting processes as responses to decentralized information and incentive problems we focus in this paper on when a level of a managerial hierarchy will delegate the allocation of capital across projects and time to the level below it in our model delegation is a way to save on costly investigation of proposed projects therefore it is more extensive the larger are the costs of such investigations this delegation takes advantage of the fact that the lower level manager s preferences are assumed to be similar though not identical to those of the higher level

capital budgeting in multidivision firms information agency and incentives author s bernardo antonio e cai hongbin luo jiang abstract we consider a firm with two investment projects divisions each run by a manager who can provide i unverifiable information about the quality of either or both projects and ii unverifiable access to valuable resources that can enhance the cash flows of either or both projects we then examine the extent to which capital allocation and managerial compensation schemes can be designed jointly to mitigate the information and incentive problems within the firm we find that the firm underinvests in capital in both projects relative to the first best level optimal managerial profit sharing increases in the quality of both projects and managers underinvest resources in both projects interestingly the underinvestment problem in one project is less severe when the other project is higher quality this effect will be stronger when the moral hazard problem is more acute and project returns are more highly correlated we also predict that multi division firms will invest more less than single division firms when other divisions in the firm perform well poorly

internal capital markets and the competition for corporate resources this article examines the role of corporate headquarters in allocating scarce resources to competing projects in an internal capital market unlike a bank headquarters has control rights that enable it to engage in winner picking the practice of actively shifting funds from one project to another by doing a good job in the winner picking dimension headquarters can create value even when it cannot help at all to relax overall firm wide credit constraints the model implies that internal capital markets may sometimes function more efficiently when headquarters oversees a small and focused set of projects this article analyzes the process by which internal capital markets channel limited resources to different uses inside a company in so doing it seeks to address two related sets of questions first what is the fundamental economic rationale for creating an internal capital market that is under what circumstances can it make sense to combine several technologically distinct projects under one roof and have them seek funding from corporate headquarters as opposed to setting them up as stand alone companies that each raise external financing on their own second given this rationale what is the optimal size and scope of an internal capital market should headquarters be involved in funding a large number of projects or just a few and should these projects be unrelated to one another or in similar lines of business the answers to both sets of questions flow from the insight that in a credit constrained setting where not all positive npv projects can be financed headquarters can create value by actively reallocating scarce funds across projects for example the cash flow generated by one division s activities may be taken and spent on investment in another division where the returns are higher or alternatively one division s assets may be used as collateral to raise financing that is then diverted to the other division simply put individual projects must compete for the scarce funds and headquarters job is to pick the winners and losers in this competition

revisiting the bright and dark sides of capital flows in business groups prior studies report that the business group structure and the associated intra group capital flows are prone to conflicts of interest between controlling shareholders and minority investors yet business group is a prevalent and stable structure around the globe particularly where capital markets are underdeveloped using data from china this paper empirically studies the trade off between the negative and positive roles played by intra group capital flows and tests the efficiency implications of such trade off we find that from the perspective of the whole group intra group capital flows are most efficient when the groups are least subject to conflicts of interest between controlling shareholders and minority shareholders and when they face strong external financing constraints

can socialism in internal capital markets occur in the absence of managerial rent seeking socialism in internal capital markets sicm is the phenomenon whereby multi division firms underinvest in high profit segments and overinvest in low profit segments this article modifies and extends the scharfstein and stein 2000 model that explains sicm the major modification is to abstract from rent seeking behaviour a central ingredient that is used by most sicm models and has the side effect of overturning sicm when the underlying rent seeking game is slightly perturbed it is shown that when division managers private benefits are not exactly propotional to their division s production profit as assumed by scharfstein and stein 2000 sicm arises due to the ceo s incentive to extract gain from the trade of capital between his division managers by equalizing their marginal private benefits instead of accommodating rent seeking furthermore we show that diversification discounts exist increase in diversity and decrease in ceo ownership the results are robust to endogenizing the investors

internal competition for corporate resources and incentives in teams invoking thefree rider problem in teams many observersfind profit sharing in large organizations puzzling because it should have negligible incentive effects we show that a firm can be decomposed into two separate teams whose outputs can be observed thenprofit sharing combined with competition between these two teamsfor internal resourcesfrequently solves thefree rider problem using this result we endogenize thefirm s organizational structure and show that in the presence of economies of scale small firms tend to organize as unita y firms while largefirms choose the multidivisional organizationalform

business collateral and personal commitments in sme lending abstract using a database of sme credit approvals from a large belgian bank this paper extends the empirical evidence on the determinants of collateral by examining the determinants of business collateral simultaneously with the determinants of personal collateral commitments our results suggest that firm and relationship characteristics seem to be more important determinants of collateral commitment protection than loan and lender characteristics family firms are more likely to offer a higher degree of collateral commitment protection while introducing competition between banks decreases this likelihood the collateral requirement decreases in the length of the bank borrower relationship furthermore trade credit seems to have a signalling effect the lazy banks hypothesis was not supported our results suggest that beside risk arguments also commercial arguments help explain the pledging of collateral using a continuation ratio logit model we discover several differences in the determinants of the collateralisation decision and the determinants of the type of collateral commitments

internal equity financing and the performance of multinational subsidiaries in emerging economies we examine the internal equity financing of the multinational subsidiary which retains and reinvests its own earnings internal equity financing is a type of firm specific advantage fsa along with other traditional fsas in innovation research and development brands and management skills it also reflects subsidiary level financial management decision making here we test the contributions of internal equity financing and subsidiary level financial management decision making to subsidiary performance using original survey data from british multinational subsidiaries in six emerging countries in the south east asia region our first finding is that internal equity financing acts as an fsa to improve subsidiary performance our second finding is that over 90 of financing sources including capital investment by the parent firms in the british subsidiaries come from internal funding our third finding is that subsidiary level financial management decision making has a statistically significant positive impact on subsidiary performance our findings advance the theoretical empirical and managerial analysis of subsidiary performance in emerging economies

a theory of firm scope the formal literature on firm boundaries has assumed that ex post conflicts are resolved through bargaining in reality parties often simply exercise their decision rights we develop a model based on shading in which the use of authority has a central role we consider two firms deciding whether to adopt a common standard nonintegrated firms may fail to coordinate if one firm loses an integrated firm can internalize the externality but puts insufficient weight on employee benefits we use our approach to understand why cisco acquired stratacom a provider of new transmission technology we also analyze delegation

optimal dynamic capital budgeting i study optimal design of a dynamic capital allocation process in an organization in which the division manager with empire building preferences privately observes the arrival and properties of investment projects and headquarters can audit projects at a cost under certain conditions a budgeting mechanism with threshold separation of financing is optimal headquarters 1 allocate a spending account to the manager and replenish it over time 2 set a threshold such that projects below it are financed from the account while projects above are financed fully by headquarters upon an audit further analysis studies when co financing of projects is optimal and how the size of the account depends on past performance of projects

financing a portfolio of projects this article shows that investors financing a portfolio of projects may use the depth of their financial pockets to overcome entrepreneurial incentive problems competition for scarce informed capital at the refinancing stage strengthens investors bargaining positions and yet entrepreneurs incentives may be improved because projects funded by investors with shallow pockets must have not only a positive net present value at the refinancing stage but one that is higher than that of competing portfolio projects our article may help understand provisions used in venture capital finance that limit a fund s initial capital and make it difficult to add more capital once the initial venture capital fund is raised jel g24 g31 venture capital finance takes place in an environment of severe informational asymmetries and incentive problems venture capitalists not only must assess the quality of investment proposals submitted to them for funding but once the initial funding has taken place they must also give the right incentives to the entrepreneurs and monitor the performance of the portfolio companies on an ongoing basis this article departs from most of the existing literature by explicitly recognizing that venture capitalists manage a portfolio of projects the need for portfolio management arises if the amount of capital both financial and human available to a venture capital fund is limited implying that venture capitalists must carefully choose which projects to allocate their scarce financial and human resources to 1 by staging their investments venture capitalists retain the right to deny capital infusions to particular

correlated shocks within firms abstract this paper investigates the correlations and covariances of the growth rates of establishments that have a common parent firm due to its association with cross country business cycles and propagation of idiosyncratic shocks firm comovement is an important facet of macroeconomic research using a long panel of canadian manufacturing establishments i find that within firm establishment pairs have correlations 0 0477 higher than between firm establishment pairs which have an average correlation very close to zero after controlling for industry and region effects

is it inefficient investment that causes the diversification discount diversified conglomerates are valued less than matched portfolios of pure play firms recent studies find that this diversification discount results from conglomerates inefficient allocation of capital expenditures across divisions much of this work uses tobin s q as a proxy for investment opportunities therefore hypothesizing that q is a good proxy this paper treats measurement error in q using a measurement error consistent estimator on the sorts regressions in the literature i find no evidence of inefficient allocation of investment the results in the literature appear to be artifacts of measurement error and of the correlation between investment opportunities and liquidity diversif ied conglomerates appear to trade at a discount relative to matched portfolios of pure play firms studies documenting this stylized fact include lang and stulz 1994 berger and ofek 1995 comment and jarrell 1995 and servaes 1996 recent empirical work has sought to find the source of this diversification discount building on the theoretical work in milgrom and roberts 1990 stein 1997 and scharfstein and stein 2000 on the inefficiency of internal capital markets this literature has asked specifically whether diversified firms allocate their capital expenditures inefficiently across divisions the canonical answer has been yes and has been supported by two types of evidence first studies such as lamont 1997 shin and stulz 1998 shin and park 1998 and rajan servaes and zingales 2000 all find that internal capital markets in conglomerates transfer funds across divisions in a suboptimal manner second studies such as berger and ofek and scharfstein 1998 provide evidence suggesting that the divisions of conglomerates do not respond adequately to investment opportunities in comparison to single segment firms however these findings about divisional investment may be an artifact of measurement error most of these studies rely on tobin s q the market value of the capital stock divided by its replacement value as a proxy for investment opportunities and tobin s q is likely to be a poor proxy shin and stulz

the bright side of internal capital markets we examine capital expenditure decisions of discount firms in response to wal mart s entry into their markets before wal mart s entry focused incumbents and discount divisions of diversified incumbents are similar in size geographic dispersion and firm debt levels however discount divisions of diversified firms are significantly more productive after wal mart s entry diversified firms are quicker to either exit the discount business or stay and fight also their capital expenditures are more sensitive to the productivity of their discount business internal capital markets function well as transfers are away from the worsening discount divisions it appears diversified firms make better investment decisions

why the npv criterion does not maximize npv this article presents a theory of capital allocation that shows how the use of net present value npv as an investment criterion leads to inefficient capital budgeting outcomes and how this criterion may be dominated by other capital budgeting criteria like the internal rate of return and the profitability index the essence of our theory is rooted in the mainstream paradigm of corporate finance while firms use npv to measure the addition to firm value from prospective projects classical informational and agency considerations prevent it from implementing the optimal capital budgeting outcome our theory also identifies conditions when alternative criteria should be used finally we characterize when direct monitoring through capital budgeting dominates compensation contracts in alleviating the agency problem copyright 2004 oxford university press

a trade off theory of ownership and capital structure abstract this paper determines the optimal ownership share held by a unit into a second unit when both face a tax bankruptcy trade off full ownership is optimal when the first unit has positive debt because dividends help avoid its default positive debt is in turn optimal when its corporate tax rate exceeds a threshold and or thin capitalization rules place an upper limit on the debt level in the second unit and or the volcker rule bans bailout transfers to the second unit full ownership is no longer optimal only if there is a tax on intercorporate dividend this theory rationalizes observations on multinationals financial conglomerates and family groups

south korean chaebols and value based management south korean industrial conglomerates chaebols are discussed in the context of value based management vbm recent economics and finance literature on the diversion of corporate resources from the firm to the controlling shareholders tunneling for which chaebols are notoriously known is discussed chaebols have engaged in empire building and expropriation of minority shareholders distorting the process of efficient resource allocation in south korea and became the root cause of the 1997 financial crisis we argue that the 1997 crisis should be viewed as a consequence of chaebols systematic deviation from the guiding principles of vbm we use tunneling within chaebols as an example of the need to directly address prohibition of the expropriation of minority shareholders as a primary postulate of vbm we argue that vbm should require that the value generated by the firm not be expropriated from minorities or any stakeholders by dominant shareholders we also examine moral and ethical considerations and present explanations as to why the unethical practice of tunneling has been tolerated by the south korean public we show that public opinion on tunneling is changing and that the treatment of minority shareholders by chaebols controlling families is becoming increasingly unacceptable to south koreans

corporate diversification and credit constraints real effects across the business cycle we study whether differences in access to credit cause focused firms to perform differently from diversified firms in the product market prior work has identified binding credit constraints for bank dependent firms during recessions we assess whether corporate diversification alleviates these constraints we find that during recessions sales growth rates drop more for bank dependent focused firms than for rival segments of bank dependent diversified firms we also find that during recessions inventory growth rates drop more for bank dependent focused firms than for bank dependent diversified firms even after we control for contemporaneous sales growth consistent with a credit constraint explanation we find no difference in the sensitivities to recessions of bank independent focused and bank independent diversified firms jel g30 g31 g32 copyright 2006 oxford university press

housing price booms and crowding out effects in bank lending analyzing the period 1988 2006 we document that banks that are active in strong housing markets increase mortgage lending and decrease commercial lending firms that borrow from these banks have significantly lower investment this is especially pronounced for firms that are more capital constrained or borrow from more constrained banks various extensions and robustness analyses are consistent with the interpretation that commercial loans were crowded out by banks responding to profitable opportunities in mortgage lending rather than with a demand based interpretation the results suggest that housing prices appreciations have negative spillovers to the real economy which were overlooked thus far received november 29 2016 editorial decision january 12 2018 by editor david hirshleifer authors have furnished an internet appendix which is available on the oxford university press web site next to the link to the final published paper online

resource allocation within firms and financial market dislocation evidence from diversified conglomerates we argue and demonstrate that resource allocation within firms internal capital markets provides an important force countervailing financial market dislocation we estimate a structural model of internal capital markets to separately identify and quantify the forces driving the reallocation decision and illustrate how these forces interact with external capital market stress the weaker stronger division obtains too much little capital as though it is 12 9 more less productive than it really is out of sample simulated data are consistent with the actual data showing that internal capital markets offset financial market stress during the recent financial crisis by 16 30

cross border banking credit access and the financial crisis abstract we study the sensitivity of credit supply to bank financial conditions in 16 emerging european countries before and during the financial crisis we use survey data on 10 701 applicant and non applicant firms that enable us to disentangle effects driven by positive and negative shocks to the banking system from demand shocks that may vary across lenders we find strong evidence that firms access to credit was affected by changes in the financial conditions of their banks during the crisis firms were more credit constrained if they were dealing with banks that experienced a decline in equity and tier 1 capital as well as losses on financial assets we also find that access to credit reflects the balance sheet conditions of foreign parent banks the effect of positive and negative shocks to a bank is greater for riskier firms and firms with fewer tangible assets

resource allocation decisions under imperfect evaluation and organizational dynamics research and development r d projects face significant organizational challenges especially when the different units who run these projects compete among each other for resources in such cases information sharing among the different units is critical but it cannot be taken for granted instead individual units need to be incentivized to not only exert effort in evaluating their projects but also to truthfully reveal their findings the former requires an emphasis on individual performance whereas the latter relies on the existence of a common goal across the organization motivated by this commonly observed tension we address the following question how should a firm balance individual and shared incentives so that vital information is both acquired and equally importantly disseminated to the entire organization our model captures two key characteristics of r d experimentation information is imperfect and it is also costly our analysis yields several important implications for the design of such incentive schemes and the management of r d portfolios this paper was accepted by david hsu entrepreneurship and innovation

the influence of financial and legal institutions on firm size abstract theory does not predict an unambiguous relationship between a country s financial and legal institutions and firm size using data on the largest industrial firms for 44 countries we find that firm size is positively related to financial intermediary development the efficiency of the legal system and property rights protection we do not find any evidence that firms are larger in order to internalize the functions of the banking system or to compensate for the general inefficiency of the legal system

foreign banks and credit stability in central and eastern europe a panel data analysis abstract we examine whether foreign and domestic banks in central and eastern europe react differently to business cycles and banking crises our panel dataset comprises data of more than 250 banks for the period 1993 2000 with information on bank ownership and mode of entry during crisis periods domestic banks contracted their credit base whereas greenfield foreign banks did not also home country conditions matter for foreign bank growth as there is a significant negative relationship between home country economic growth and host country credit by greenfields finally greenfield foreign banks credit growth is influenced by the health of the parent bank

intertemporal capital budgeting abstract this paper analyzes the optimal capital budgeting mechanism when divisional managers are privately informed about the arrival of future investment projects consistent with field study evidence an optimal allocation mechanism can include a stipulation that a capital request for discretionary investment will be declined with positive probability in the period after a significant investment was made even though this is ex post suboptimal the model derives a number of empirical predictions regarding capital budgeting and the investment of financially constrained firms

internal capital markets and corporate politics in a banking group we analyze proprietary internal capital allocation data from a large retail banking group consisting of member banks and a headquarters organization we find that capital allocations from headquarters compensate for deposit shortfalls on the bank level suggesting that the headquarters offers deposit smoothing to member banks we then analyze how the distribution of influence within the group relates to capital allocations and lending behavior more influential banks are allocated more funds from headquarters and their loan growth is less sensitive to their deposit base the effects of influence are stronger if banks have a greater demand for deposit smoothing

budget selection when agents compete abstract a principal selects a budget k of how many projects to fund within an organization and then consults n agents each of whom has private information about his own project s value after receiving cheap talk reports from the agents the principal decides which projects to implement subject to the budget and agents report on new i i d projects every period until the budget is exhausted when the budget is small relative to the number of agents each of whom are biased towards their own projects competition between agents degrades the quality of information conveyed in equilibrium and lowers the principal s payoff a larger budget induces less competition and therefore may be selected in order to extract more information from the agents even though this leads to some unprofitable projects being adopted in an extension i find that a policy of never allowing a funded agent to seek funding again increases payoffs compared to when the agent can always re seek funding

liquidity management of u s global banks internal capital markets in the great recession abstract the recent crisis highlighted the importance of globally active banks in linking markets one channel for this linkage is through how these banks manage liquidity across their entire banking organization we document that funds regularly flow between parent banks and their affiliates in diverse foreign markets we show that parent banks when hit by a funding shock reallocate liquidity in the organization according to a locational pecking order affiliate locations that are important for the parent bank revenue streams are relatively protected from liquidity reallocations in the organization while traditional funding locations are more extensively used to buffer shocks to the parent bank balance sheets

tobin s q and the importance of focus in firm performance using tobin s q as a measure of performance we seek to estimate the relative importance of industry focus and share effects in determining firm performance our methods are analogous to those of richard schmalensee and like him we find that industry effects account for the majority of the explained variance however we also find that firm effects exist in the form of focus effects that is narrowly diversified firms do better than widely diversified firms we interpret this finding as consistent with profit maximization by firms with different factor endowments

pyramidal groups and debt abstract this paper suggests that debt should be raised by subsidiaries in order to exploit the limited liability of the holding company however when this behavior increases the cost of funds the holding might prefer to raise debt to a point where it would also default when subsidiaries are insolvent after accounting for standard controls we find that holding companies in italian pyramids have higher leverage than subsidiaries and that the cash flow share of the entrepreneur in the subsidiary does not play a significant role these findings are consistent with the implications of our model of group capital structure

multinational banks in the crisis foreign affiliate lending as a mirror of funding pressure and competition on the internal capital market abstract we investigate how the lending activities abroad of a multinational bank s local and hub affiliates have been affected by funding difficulties during the financial crisis we find that affiliates local deposits and performance have been stabilizing loan supply by contrast relying on short term wholesale funding has increasingly proven to be a disadvantage in the crisis which has seen inter bank and capital markets freeze by introducing a liable approximate measure for intra bank flows we detect competition for intra bank funding between the affiliates abroad as well as an increasing focus on the parent bank s home market activities in addition the more an affiliate abroad relies on intra bank funding in the crisis the greater its dependence on its parent bank having a stable deposit and long term wholesale funding position we consider changes in long term lending to the private sectors of 40 countries by the affiliates of the 68 largest german banks to obtain a more precise picture we clean our lending data from valuation effects

teaching versus research a multi tasking approach to multi department universities we study the possible implications of incentive schemes as a tool to promote efficiency in the management of universities in this paper we show that by designing internal financial rules which create yardstick competition for research funds a multi department university may induce better teaching quality and research as compared to the performance of independent departments

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

what broad banks do and markets don t cross subsidization abstract we show that interbank markets are a poor substitute for broad banks that operate across regions or sectors in the presence of regional or sectoral asset and liquidity shocks interbank markets can distribute liquidity efficiently but fail to respond efficiently to asset shocks broad banks can condition on the joint distribution of both shocks and hence achieve an efficient internal allocation of capital this allocation involves the cross subsidization of loans across regions or sectors compared to regional banks that are linked through well functioning interbank markets broad banks lead to higher levels of aggregate investment higher output and less fluctuations within regions however broad banks generate endogenously aggregate uncertainty

a theory of yardstick competition in the typical regulatory scheme a franchised monopoly has little incentive to reduce costs this article proposes a mechanism in which the price the regulatedfirm receives depends on the costs of identical firms in equilibrium each firm chooses a socially efficient level of cost reduction the mechanism generalizes to cover heterogeneous firms with observable differences medicare s prospective reimbursement of hospitals by using diagnostically related groups is a scheme very similar to the one outlined here

divisional diversity and the conglomerate discount evidence from spinoffs abstract existing literature argues that disparity in investment opportunities within diversified firms can erode firm value we investigate the diversity cost hypothesis of spinoffs by using post spinoff data to 1 reconstruct the diversified firm after the spinoff and assess the aggregate improvement in value and 2 relate any value improvements to changes in diversity we find that improvements in aggregate value depend significantly on changes in both a direct measure of diversity and measures based on industry proxies we conclude that diversification discounts at least partially reflect a value loss due to the diversified nature of the firm itself rather than selection bias or measurement error

when does coordination require centralization this paper compares centralized and decentralized coordination when manag ers are privately informed and communicate strategically we consider a multi divisional organization in which decisions must be adapted to local conditions but also coordinated with each other information about local conditions is dispersed and held by self interested division managers who communicate via cheap talk the only available formal mechanism is the allocation of decision rights we show that a higher need for coordination improves horizontal com

reallocation of corporate resources and managerial incentives in internal capital markets abstract diversified 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 moreover we show that asymmetries in size and growth prospects increase the diversification discount

conglomerates and industry distress focusing on economic distress episodes in an industry we estimate the effect of conglomeration on resource allocation distressed segments have higher sales growth higher cash flow and higher expenditure on research and development than single segment firms this is especially true for segments with high past performance for unrated firms and in competitive industries single segment firms increase cash holding and the diversification discount reduces during industry distress firms with high past performance acquire their industry counterparts and firms with low past performance exit the distressed industry industries more prone to distress have greater conglomeration overall conglomeration enables segments to avoid financial constraints during industry distress the author 2011 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

fund families as delegated monitors of money managers because a money manager learns more about her skill from her management experience than outsiders can learn from her realized returns she expects inefficiency in future contracts that condition exclusively on realized returns a fund family that learns what the manager learns can reduce this inefficiency cost if the family is large enough the family s incentive is to retain any given manager regardless of her skill but when the family has enough managers it adds value by boosting the credibility of its retentions through the firing of others as the number of managers grows the efficiency loss goes to zero

the going public decision and the development of financial markets this paper explores the linkages between stock price efficiency the choice between private and public financing and the development of capital markets in emerging economies generally the advantage of public financing is high if costly information is diverse and cheap to acquire and if investors receive valuable information without cost the value of public firms generally depends on public market size which implies that there can be a positive externality associated with going public so that an inferior equilibrium can exist where too few firms go public the model is consistent with empirical observations on financial market development

capital constraints asymmetric information and internal capital markets in banking new evidence a growing literature investigates the role of internal capital markets in mitigating financial constraints faced by the subsidiaries of a conglomerate most studies have relied on indirect tests based on correlations between the cash flows and the investment of the subsidiaries in contrast we avoid the widespread criticisms of such specifications by providing direct tests that focus on the mechanisms through which internal reallocations of funds occur we find that internal capital markets are used by multibank holding companies to mitigate capital constraints faced by individual bank subsidiaries in addition we show that internal capital management within a multibank holding company involves not only the movement of capital to those subsidiaries with a relatively greater need for capital but also the movement of assets loans from less well capitalized to better capitalized subsidiaries by means of loan sales and purchases among the subsidiaries furthermore net loan sales are used to allow efficiency enhancing specialization among bank subsidiaries insofar as those subsidiaries with the best loan origination opportunities are able to focus on loan originations even if they do not have sufficient capital to hold the loans our evidence is consistent with banks affiliated with holding companies more actively participating in loan sales and purchases because by using their internal secondary loan market they are able to avoid the lemons problem faced by stand alone banks

evidence on the dark side of internal capital markets this article documents differences between the sensitivity of investment of stand alone firms and unrelated segments of conglomerate firms unrelated segments exhibit lower o sensitivity of investment than stand alone firms this fact is driven by unrelated segments of conglomerate firms that tend to invest less than stand alone firms in high s industries this finding is robust to matching on industry year size age and profitability the differences are more pronounced in conglomerates in which top management has small ownership stakes suggesting that agency problems explain the investment behavior

is knowledge power knowledge flows subsidiary power and rent seeking within mncs in recent years as multinational corporation mnc subsidiaries have become more closely linked to international networks their knowledge intensity has risen and some of their r d has gained a more creative role simultaneously and often connectedly many subsidiaries have acquired considerable strategic independence in all aspects of their operations and therefore are able to exercise considerable intra firm bargaining power to influence the distribution of the firm s resources in this context we suggest that intra mnc knowledge flows are a key determinant of subsidiary bargaining power we argue that subsidiary managers can exploit such power to pursue their own ends such rent seeking behavior is implicit in much of the literature on managerialism but our analysis suggests that such behavior can now occur in headquarters subsidiary and subsidiary subsidiary relations thus subsidiary strategic independence designed to enhance the competitiveness of outputs market knowledge and inputs asset seeking and learning can be corroded when the pursuit of subsidiary objectives encourages rent seeking empirical analysis of a sample of high technology subsidiaries in the uk provides strong support for the theory we examine several avenues whereby the incentives of units within the mnc can be aligned

the influence of unrelated and related diversification on fraudulent reporting this study suggests that unrelated diversification has a positive influence on the probability of fraudulent reporting whereas related diversification has a negative influence on the probability of fraudulent reporting the strength of the influence of these corporate level strategies is contingent on the moral character of the firm unrelated diversification provides opportunity for financial innovation within the firm s internal capital market which can result in fraudulent reporting this is more likely when the moral character of the firm is driven by a conscienceless financial self interest motive as implied by the firm s contempt toward the larger community in terms of damage inflicted on the interests of people outside the firm in contrast related diversification where product divisions focus on mutual sharing and monitoring of operational activities can reduce the probability of fraudulent reporting this is more likely when constituents within the firm view themselves as moral citizens as implied by the firm s benevolence toward the larger community hence while unrelated diversification focuses the energies of managers within the firm on financial manipulation related diversification focuses these energies on productive purposes

managerial incentives and internal capital markets capital budgeting in multidivisional firms depends on the external assessment of the whole firm as well as on headquarters assessment of the divisions while corporate headquarters may create value by directly monitoring divisions the external assessment of the firm is a public good for division managers who consequently are tempted to free ride as the number of divisions increases the free rider problem is aggravated and internal capital markets substitute for external capital markets in the provision of managerial incentives the analysis relates the value of diversification to characteristics of the firm the industry and the capital market

the strategic impact of resource flexibility in business groups we show that in business groups with efficient internal capital markets resources may be channelled to either more or less profitable units depending on the amount of internal resources a group may exit a market in response to increased competition or channel funds to the subsidiary operating in that market this has important implications for the strategic impact of group membership affiliation to a monopolistic subsidiary can make a cash rich poor firm more less vulnerable to entry deterrence also resource flexibility within a group makes subsidiaries reaction functions flatter thus discouraging rivals strategic commitments when entry is accommodated

a theory of strategic venture investing some venture capital investors seek purely financial gains while others such as corporations also pursue strategic objectives the paper examines a model where a strategic investor can achieve synergies but can also face a conflict of interest with the entrepreneur if the start up is a complement to the strategic partner it is optimal to obtain funding from the strategic investor if the start up is a mild substitute the entrepreneur prefers an independent venture capitalist with a strong substitute syndication becomes optimal such that the independent venture capitalist is the active lead investor and the strategic partner a passive co investor the expected returns for the entrepreneur are nonmonotonic lowest for a mild substitute and higher for a strong substitute as well as for a complement the paper also explains why a strategic investor often pays a higher valuation than an independent venture capitalist

the real effects of government owned banks evidence from an emerging market using plant level data for brazilian manufacturing firms this paper provides evidence that government control over banks leads to significant political influence over the real decisions of firms i find that firms eligible for government bank lending expand employment in politically attractive regions near elections these expansions are associated with additional favorable borrowing from government banks further these persistent expansions take place just before competitive elections and are associated with lower future employment growth by firms in other regions the analysis suggests that politicians in brazil use bank lending to shift employment towards politically attractive regions and away from unattractive regions

commercial bank ownership and performance in china this study examines the determinants of bank performance based on proxy variables that assess the quality of assets profitability liquidity and overall performance using a sample of 111 chinese commercial banks over the period of 2000 2012 we find that foreign banks appear to have better asset quality and overall performance although lower profitability compared to domestic banks in contrast the state owned banks tend to be more profitable and have better liquidity position compared with other domestic banks and foreign banks at bank level equity liability ratio exerts significant influence on overall bank performance while at the macroeconomic level per capital gdp gdp growth inflation and unemployment rates appear to have a bearing on bank performance

coinsurance effect and bank lines of credit abstract the coinsurance effect hypothesis predicts that firm diversification reduces financial constraints through imperfectly correlated cash flows among segments we empirically test the hypothesis by studying the relation between coinsurance effect and bank lines of credit we find that coinsurance effect is associated with a higher availability of bank lines of credit and that diversified firms hold a higher level of bank lines of credit if they have higher investment opportunities and if they are bank dependent we find that diversified firms hold a higher fraction of corporate liquidity in the form of bank lines of credit due to the coinsurance effect the findings are consistent with the coinsurance effect hypothesis and contribute to the debate on the value consequence of firm diversification by disclosing a specific channel through which firm diversification affects financial constraints

proactive r d management and firm growth a punctuated equilibrium model the external environment is characterized by periods of relative stability interspersed with periods of extreme change implying that high performing firms must practice exploration and exploitation in order to survive and thrive in this paper we posit that r d expenditure volatility indicates the presence of proactive r d management and is evidence of a firm moving from exploitation to exploration over time this is consistent with a punctuated equilibrium model of r d investment where shocks are induced by reactions to external turbulence using an unbalanced panel of almost 11 000 firm years from 1997 to 2006 we show that greater fluctuations in the firm s r d expenditure over time are associated with higher firm growth developing a contextual view of the relationship between r d expenditure volatility and firm growth we find that this relationship is weaker among firms with higher levels of corporate diversification and negative among smaller firms and those in slow clockspeed industries

the impact of stock market information production on internal resource allocation abstract we analyze the resource allocation decision of a manager inside a multidivision firm whose compensation is based on the firm s stock price we find that internal investments exhibit a positive correlation across the firms divisions namely when two single division firms merge the optimal investment level in one division becomes more positively related to the investment level in the other division in addition following a spinoff divisional investments decline increase whenever the separated division has a project with a low high sharpe ratio finally multidivision firms trade at a discount which is larger the more diverse the investment sets of the divisions

choosing to cofinance analysis of project specific alliances in the movie industry we use a movie industry project by project dataset to analyze the choice of financing a project internally versus financing it through outside alliances the results indicate that project risk is positively correlated with alliance formation movie studios produce a variety of films and tend to develop their safest projects internally our findings are consistent with internal capital market explanations we find mixed evidence regarding resource pooling i e sharing the cost of large projects finally the evidence shows that projects developed internally perform similarly to projects developed through outside alliances

conglomerate entrenchment under optimal financial contracting we provide a formal analysis of the notion that conglomerates are more entrenched as they have deeper pockets using the financial contracting model of bolton and scharfstein 1990 we can isolate two effects that confirm this conjecture the pooling of cash flows which allows to smooth out repayments and the ability to obtain better credit terms for less profitable business segments the internal capital market operated in a conglomerate may however work in the opposite direction increasing the sensitivity of operations to own cash flows and increasing the likelihood of exit

are internal capital markets efficient using segment information from compustat we find that the investment by a segment of a diversified firm depends on the cash flow of the firm s other segments but significantly less than it depends on its own cash flow the investment by segments of highly diversified firms is less sensitive to their cash flow than the investment of comparable single segment firms the sensitivity of a segment s investment to the cash flow of other segments does not depend on whether its investment opportunities are better than those of the firm s other segments

market structure internal capital markets and the boundaries of the firm we study how the creation of an internal capital market an icm can invite strategic responses in product markets that in turn shape firm boundaries icms provide ex post resource flexibility but come with ex ante commitment costs alternatively stand alones possess commitment ability but lack flexibility by creating flexibility integration can sometimes deter a rival s entry but commitment problems can also invite predatory capital raising these forces drive different organizational equilibria depending on the integrator s relation to the product market hybrid organizational forms like strategic alliances can sometimes dominate integration by offering some of its benefits with fewer strategic costs this paper develops a theory of the firm in which internal capital markets affect the ability to compete in product markets in our model a firm s decision to operate an internal capital market affects the fund raising behavior of its product market rivals an internal capital market can either scare away rival firms or else induce them to compete more aggressively raising more capital than they otherwise would in equilibrium these strategic interactions determine the boundaries of the firm

internal versus external capital markets this paper presents a framework for analyzing the costs and benefits of internal versus external capital allocation we focus pritnarily on comparing an internal capital market with bank lending while both represent centralized forms of financing in the former case the financing is owner provided while in the latter ceise it is not we argue that the ownership aspect of internal capital allocation has three important consequences 1 it leads to more monitoring than bank lending 2 it reduces managers entrepreneurial incentives and 3 it makes it easier to efficiently redeploy the assets of projects that are performing poorly under existing management

the performance of corporate alliances evidence from oil and gas drilling in the gulf of mexico abstract i use data on oil and gas drilling in the gulf of mexico to measure how a corporate alliance a group of firms that jointly develops an offshore tract performs relative to a solo firm i employ a regression discontinuity strategy based on bids in first price sealed bid auctions for the rights to develop leases by focusing on leases where one organizational form narrowly outbids the other i measure drilling outcomes while controlling for the endogenous matching of projects and organizational forms solo firm leases are less profitable than alliance leases because alliance members combine their information and expertise

bank ratings what determines their quality this paper examines the quality of credit ratings assigned to banks by the three largest rating agencies we interpret credit ratings as relative assessments of creditworthiness and define a new ordinal metric of rating error based on banks expected default frequencies our results suggest that on average large banks receive more positive bank ratings particularly from the agency to which the bank provides substantial securitization business these competitive distortions are economically significant and contribute to perpetuate the existence of too big to fail banks we also show that overall differential risk weights recommended by the basel accords for investment grade banks bear no significant relationship to empirical default probabilities harald hau sam langfield and david marques ibanez

a theory of socialistic internal capital markets 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

subject response to loss in an experimental tournament abstract we present tests for the influence of losing on subsequent behavior in a nongame tournament experiment the results are uniformly insignificant suggesting non convex incentives such as tournaments or quotas do not cause suboptimal behavior among losers as has been asserted

the capital budgeting process incentives and information we study the capital allocation process within firms observed budgeting processes are explained as a response to decentralized information and incentive problems it is shown that these imperfections can result in underinvestment when capital productivity is high and overinvestment when it is low we also investigate how the budgeting process may be expected to vary with firm or division characteristics such as investment opportunities and the technology for information transfer there is general agreement that investment decisions are the most important decisions made by corporations the choice of projects and the level of investment is critical not just for stakeholders of the firm but also for the economic well being of society as a whole it has been alleged that u s firms invest too little and tend to overemphasize short term results for example porter 1992 citing poterba and summers 1992 asserts that u s firms use hurdle rates to evaluate investment projects that are higher than their estimated costs of capital to understand the investment behavior of firms one must consider both the process by which external capital is made available to firms and the process by which internally and externally raised capital is allocated to investment projects within the firm considerable attention has been paid to how firms raise external capital the fundamental insight in this area is the celebrated result of modigliani and miller mm that capital structure is irrelevant in the absence of capital market frictions accordingly in the three decades since their contribution research on how external capital is raised has focused on market frictions including information and incentive problems relatively little research has focused on the internal allocation process and its relationship to the organization of the firm modern finance theory prescribes allocating capital according to the net present value npv rule just as the mm result itself provides no theory of the arrangements under which

agency conflicts in the presence of random private benefits from project implementation abstract we study a contracting problem where a principal delegates the decision to implement a project to an agent who obtains private information about the value of the project before making the implementation decision moral hazard arises because the agent gets private random non contractible benefits or incurs private random non contractible costs if the project is implemented this contracting problem is pervasive when project and benefits are interpreted broadly even when the agent is risk neutral we show that the principal s optimal contract always insufficiently discourages the agent from implementing negative npv projects and also insufficiently encourages the agent to implement positive npv projects we also show that the principal s residual claim always increases in the project s npv a result that is generally unobtainable for optimal contracts in effort based moral hazard problem settings

should business groups be dismantled the equilibrium costs of efficient internal capital markets abstract we analyze the relationship between conglomerates internal capital markets and the efficiency of economy wide capital allocation and we identify a novel cost of conglomeration that arises from an equilibrium framework because of financial market imperfections engendered by imperfect investor protection conglomerates that engage in winner picking stein 1997 internal capital markets and the competition for corporate resources journal of finance 52 111 133 find it optimal to allocate scarce capital internally to mediocre projects even when other firms in the economy have higher productivity projects that are in need of additional capital this bias for internal capital allocation can decrease allocative efficiency even when conglomerates have efficient internal capital markets because a substantial presence of conglomerates might make it harder for other firms in the economy to raise capital we also argue that the negative externality associated with conglomeration is particularly costly for countries that are at intermediary levels of financial development in such countries a high degree of conglomeration generated for example by the control of the corporate sector by family business groups could decrease the efficiency of the capital market our theory generates novel empirical predictions that cannot be derived in models that ignore the equilibrium effects of conglomerates these predictions are consistent with anecdotal evidence that the presence of business groups in developing countries inhibits the growth of new independent firms because of a lack of finance

a reexamination of the conglomerate merger wave in the 1960s an internal capital markets view one possible explanation for bidding firms earning positive abnormal returns in diversifying acquisitions in the 1960s is that internal capital markets were expected to overcome the information deficiencies of the less developed capital markets examining 392 bidder firms during the 1960s we find the highest bidder returns when financially unconstrained buyers acquire constrained targets this result holds while controlling for merger terms and for different proxies used to classify firms facing costly external financing we also find that bidders generally retain target management suggesting that management may have provided companyspecific operational information while the bidder provided capital budgeting expertise