Business Intelligence

Internal Capital Markets: The Bright Side Of Corporate Politics

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Executive Summary

This Paper looks inside the internal capital market of a large retail-banking group to study how internal corporate politics affect internal capital allocation. The data is from the firm's managerial accounting system and covers all cash flows, internal capital transfers, and investments at the local member bank level. The authors find some evidence that member banks' investment (loan) growth is not fully independent from their own cash flow (deposit) growth. However, such inefficiencies are not apparent at more influential member banks as identified by the divergence of voting rights from ownership rights. The more influential banks are allocated more funds from the headquarters, but also restrain from overinvestment when experiencing large deposit inflows.

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