Internal Capital Markets and the Competition for Corporate Resources



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    • MIT Sloan School of Management and NBER. This research is supported by MIT's International Financial Services Research Center and the National Science Foundation. Thanks to Maureen O'Donnell for help in preparing the manuscript. I am grateful for the comments and suggestions of Rob Gertner, Oliver Hart, Bengt Holmstrom, Louis Kaplow, Rick Ruback, David Scharfstein, René Stulz, Luigi Zingales, two anonymous referees, and seminar participants at Harvard and the NBER.


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.