A q Theory of Internal Capital Markets |
| |
| Authors: | MIN DAI XAVIER GIROUD WEI JIANG NENG WANG |
| |
| Institution: | 1. Correspondence: Wei Jiang, Department of Industrial Engineering and Decision Analytics, The Hong Kong University of Science and Technology, Kowloon, Hong Kong;2. e-mail: weijiang@ust.hk. |
| |
| Abstract: | We propose a tractable model of dynamic investment, spinoffs, financing, and risk management for a multidivision firm facing costly external finance. Our analysis formalizes the following insights: (i) Within-firm resource allocation is based not only on divisions' productivity, as in winner-picking models, but also their risk; (ii) firms may voluntarily spin off productive divisions to increase liquidity; (iii) diversification can reduce firm value in low-liquidity states, as it increases the spinoff cost and hampers liquidity management; (iv) corporate socialism makes liquidity less valuable; and (v) division investment is determined by the ratio between marginal and marginal value of cash. |
| |
| Keywords: | |
|
|
