TY  - JOUR
AU  - Gertner,Robert H.
AU  - Scharfstein,David S.
AU  - Stein,Jeremy C.
TI  - Internal versus External Capital Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4776
PY  - 1994
Y2  - June 1994
UR  - http://www.nber.org/papers/w4776
L1  - http://www.nber.org/papers/w4776.pdf
N1  - Author contact info:
Robert Gertner
Graduate School of Business
The University of Chicago
5807 S. Woodlawn Ave.
Chicago, IL 60637
Tel: 773/702-7203
Fax: 773/702-0118;773/702-0458
E-Mail: rob.gertner@chicagobooth.edu

David S. Scharfstein
Harvard Business School
Baker 239
Soldiers Field
Boston, MA 02163
Tel: 617/496-5067
Fax: 617/496-8443
E-Mail: dscharfstein@hbs.edu

Jeremy C. Stein
Department of Economics
Harvard University
Littauer 209
Cambridge, MA  02138
Tel: 617/496-6455
Fax: 617/496-7352
E-Mail: jeremy_stein@harvard.edu
AB  - This paper presents a framework for analyzing the costs and benefits of internal vs. external capital allocation.  We focus primarily on comparing an internal capital market to bank lending. While both represent centralized forms of financing, in the former case the financing is owner-provided, while in the latter case 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.
ER  -