A q Theory of Internal Capital Markets

Min Dai, Xavier Giroud, Wei Jiang and Neng Wang

No 27931, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose a tractable model of dynamic investment, spinoffs, financing, and risk management for a multi-division firm facing costly external finance. Our main results are: (1) within-firm resource allocation is based not only on the divisions’ productivity—as in “winner picking” models—but also their risk; (2) firms may voluntarily spin off productive divisions to increase liquidity; (3) diversification can reduce firm value in low-liquidity states; (4) corporate socialism makes liquidity less valuable; (5) division investment is determined by the ratio between marginal q and marginal value of cash. We further generalize our model to account for capital redeployability, M&As, and managerial entrenchment.

JEL-codes: D92 G3 L25 (search for similar items in EconPapers)
Date: 2020-10
New Economics Papers: this item is included in nep-cfn and nep-rmg
Note: CF
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Published as MIN DAI & XAVIER GIROUD & WEI JIANG & NENG WANG, 2024. "A q$q$ Theory of Internal Capital Markets," The Journal of Finance, vol 79(2), pages 1147-1197.

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Working Paper: A q Theory of Internal Capital Markets (2020)
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