Firm Value, Information Problems and the Internal Capital Market

Firm Value, Information Problems and the Internal Capital Market We examine how information problems between the firm and the investor affect the value of an internal capital market. While the extant literature finds that, on average, the diversified firm's access to an internal capital market is positively related to firm value, this paper finds that the results hold only for firms which face low levels of information problems. Firms facing the high levels of information problems realize no value from internal capital market access, consistent with the Jensen Free Cash Flow hypothesis. When information problems are large, agency costs dominate any savings that result from using an internal capital market to avoid selling under-priced securities in the external capital markets. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Firm Value, Information Problems and the Internal Capital Market

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2003 by Kluwer Academic Publishers
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/A:1024839432369
Publisher site
See Article on Publisher Site

Abstract

We examine how information problems between the firm and the investor affect the value of an internal capital market. While the extant literature finds that, on average, the diversified firm's access to an internal capital market is positively related to firm value, this paper finds that the results hold only for firms which face low levels of information problems. Firms facing the high levels of information problems realize no value from internal capital market access, consistent with the Jensen Free Cash Flow hypothesis. When information problems are large, agency costs dominate any savings that result from using an internal capital market to avoid selling under-priced securities in the external capital markets.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 4, 2004

References

  • An Agency Analysis of Firm Diversification: The Consequences of Discretionary Cash and Managerial Risk Considerations
    Chen, C. R.; Steiner, T.

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