Munich Personal RePEc Archive

Opening the Black Box: Internal Capital Markets and Managerial Power

Glaser, Markus and Lopez-de-Silanes, Florencio and Sautner, Zacharias (2010): Opening the Black Box: Internal Capital Markets and Managerial Power.

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We analyze the internal capital markets of a multinational conglomerate to determine whether more powerful unit managers enjoy larger allocations. We use a new dataset of planned and actual allocations to business units to show that, although all unit managers systematically over-budget capital expenditures, more powerful and better connected managers obtain larger shares of cash windfalls and increase investment about 40% more than their less powerful peers. Results survive robustness tests and are not explained by differences in managerial abilities or an endogenous allocation of managers across units. Our findings support bargaining-power theories and provide direct evidence of a source of capital allocation frictions.

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