NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Internal Capital Markets and the Competition for Corporate Resources

Jeremy C. Stein

NBER Working Paper No. 5101
Issued in May 1995
NBER Program(s):   CF

This paper examines the role of corporate headquarters in allocating scarce resources to competing projects in an internal capital market. Unlike a bank lender, headquarters has control rights that give it both the authority and the incentive 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 its own relationship with the outside capital market is fraught with agency problems and it therefore cannot help at all to relax overall firm- wide credit constraints. One implication of the model developed here is that internal capital markets may function more efficiently when companies choose relatively focused strategies.

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Document Object Identifier (DOI): 10.3386/w5101

Published: Journal of Finance, vol.52, no.1, March 1997, pp.111-133. citation courtesy of

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