Review of Quantitative Finance and Accounting

, Volume 21, Issue 2, pp 141–156

Firm Value, Information Problems and the Internal Capital Market

  • Leonard L. Lundstrum

DOI: 10.1023/A:1024839432369

Cite this article as:
Lundstrum, L.L. Review of Quantitative Finance and Accounting (2003) 21: 141. doi:10.1023/A:1024839432369


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.

internal capital marketinformation problemsfirm valueagency

Copyright information

© Kluwer Academic Publishers 2003

Authors and Affiliations

  • Leonard L. Lundstrum
    • 1
  1. 1.Department of Business Management, College of ManagementNorth Carolina State UniversityRaleighUSA