Divisional Managers and Internal Capital markets
Denis Sosyura, Michigan
17th Jun 2011 11:30 am - Room 214/215 H69
Using hand-collected data on divisional managers at the S&P 500 firms, we provide one of the first studies of their role in the internal capital budgeting. Divisional managers with connections to the CEO receive more capital. Managers' informal connections, such as social ties to the CEO, outweigh measures of managers' informal influence, such as board membership and seniority, and affect both the appointment of managers and subsequent capital allocations in their visions. The impact of connections on investment efficiency depends on the tradeoff between agency and information asymmetry. When governance is weak, connections reduce investment efficiency and erode firm value by fostering favoritism. When information asymmetry is high, managerial ties increase investment efficiency and firm value by facilitating information transfer. Overall, we provide novel evidence on the role of formal and informal managerial influence inside conglomerates.