Firm Value, Information Problems and the Internal Capital Market
- Leonard L. Lundstrum
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We examine how information problems between the firm and the investor affect the value of an internal capital market. While the extant literature finds that, on average, the diversified firm's access to an internal capital market is positively related to firm value, this paper finds that the results hold only for firms which face low levels of information problems. Firms facing the high levels of information problems realize no value from internal capital market access, consistent with the Jensen Free Cash Flow hypothesis. When information problems are large, agency costs dominate any savings that result from using an internal capital market to avoid selling under-priced securities in the external capital markets.
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- Firm Value, Information Problems and the Internal Capital Market
Review of Quantitative Finance and Accounting
Volume 21, Issue 2 , pp 141-156
- Cover Date
- Print ISSN
- Online ISSN
- Kluwer Academic Publishers
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- internal capital market
- information problems
- firm value
- Industry Sectors
- Author Affiliations
- 1. Department of Business Management, College of Management, North Carolina State University, Raleigh, NC, 27695-7229, USA