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Opening the Black Box: Internal Capital Markets and Managerial Power





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    • Markus Glaser is from Munich School of Management, Ludwig-Maximilians-Universität München. Florencio Lopez-de-Silanes is from EDHEC Business School. Zacharias Sautner is from University of Amsterdam. We are grateful to an anonymous referee, Campbell Harvey, John Graham, and an Associate Editor for their valuable suggestions. We would also like to thank Noël Amenc, Martin Artz, Holger Daske, Marc Deloof, Ingolf Dittmann, René Garcia, Michel Habib, Roman Inderst, Rajkamal Iyer, Li Jin, Andrew Karolyi, Abraham Lioui, Lionel Martellini, Ernst Maug, Pierre Mella-Barral, Holger Mueller, Enrico Perotti, Arnold Picot, Christopher Polk, Rafael Repullo, Markus Schmid, Amit Seru, Henri Servaes, Andrei Shleifer, Denis Sosyura, Per Stromberg, René Stulz, Javier Suarez, Dirk Totzek, Belén Villalonga, Alexander Wagner, Martin Weber, Ingo Weller, David Yermack, and seminar participants at the AFA, 4NationsCup, FIRS, UT Austin, University of Amsterdam, EDHEC Business School, Aalto University/Hanken School of Economics, LBS, LSE, University of St. Gallen, UNSW, HfB Conference, Tilburg University, University of Zurich, the Oxford Finance Summer Symposium, the European Summer Symposium in Financial Markets, EFA, SAIF, SHUFE, Antwerp, CICF, DGF, Mannheim, and ECGTN for helpful comments. Financial support from EDHEC Business School and the Deutsche Forschungsgemeinschaft (DFG) is gratefully acknowledged (SFB 504 at the University of Mannheim). All errors remain our own. An earlier version of this paper circulated in 2008 under the title “Looking Inside a Conglomerate: Efficiency of Internal Capital Allocation and Managerial Power within a Firm.”


We analyze the internal capital markets of a multinational conglomerate, using a unique panel data set of planned and actual allocations to business units and a survey of unit CEOs. Following cash windfalls, more powerful managers obtain larger allocations and increase investment substantially more than their less connected peers. We identify cash windfalls as a source of misallocation of capital, as more powerful managers overinvest and their units exhibit lower ex post performance and productivity. These findings contribute to our understanding of frictions in resource allocation within firms and point to an important channel through which power may lead to inefficiencies.

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