Internal and External Capital Markets
Author | : Urs Peyer |
Publisher | : |
Total Pages | : 49 |
Release | : 2002 |
ISBN-10 | : OCLC:1290399139 |
ISBN-13 | : |
Rating | : 4/5 ( Downloads) |
Download or read book Internal and External Capital Markets written by Urs Peyer and published by . This book was released on 2002 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study tests the proposition that firms that make efficient use of their internal capital markets can lower the cost of transacting in the external capital market. Using a large panel data set of diversified firms from 1980-1998, I show that diversified firms with an efficient internal capital allocation display a higher propensity to use external capital relative to comparable single segment firms. This result is robust to including other controls, such as measures of information asymmetry, capital needs, relative valuation and firm size. Further, a higher use of external capital by diversified firms relative to single segment firms is associated with a higher excess value, but only for efficient internal capital market users. I also demonstrate the robustness of these findings by employing a sample of firms that experience an increase in expected investment outlays. My findings support predictions from theoretical models, such as Stein (1997), and are consistent with the interpretation that diversified firms with an efficient internal capital market benefit from lower-cost access to external capital by alleviating information asymmetry problems between managers and investors.