غرامت اجرایی و کارایی بازار سرمایه داخلی

We document that chief executive officer (CEO) incentive compensation plays an important role in determining internal capital market (ICM) allocation efficiency. Our results suggest that CEO equity-based compensation can be effective in ameliorating inefficiencies in internal capital allocation decisions. We find that while stock grants play an important role in motivating CEOs to make more efficient internal capital allocation decisions, there is surprisingly no discernible influence of stock options. Our analysis supports the view that private benefits derived by managers are increasing in internal capital misallocation. We also document a strong positive link between CEO incentive compensation and excess value of diversified firms suggesting that the diversification discount can be ameliorated with CEO incentive compensation. The study contributes to the ICM literature and the literature on conglomerate diversification discount.

Optimal allocation of scarce resources is at the heart of wealth creation in a free market economy. Efficient external capital markets facilitate in this process by allocating capital to the most productive investments. Similarly, efficiency of the internal capital market is critical to value creation in a multi-segment firm. Allocation of internal capital rests at the discretion of top managers who are expected to channel funds to segments with the highest value-added projects. Therefore, the value created from investments in a multi-segment firm critically hinges on how effectively internal capital is allocated among various divisions by the top managers at the corporate headquarters. These managers have control rights that allow them the discretion of “winner-picking” when it comes to allocating capital between divisions. The ability to allocate corporate resources also presents the top executives at the headquarters (we designate the chief executive officer (CEO) to represent this group) with the opportunity to extract private benefits at the cost of misallocating corporate resources leading to value destruction for the shareholders of multi-segment firms. This study examines the link between CEO incentive compensation and the efficiency of internal capital markets. Studying this linkage will contribute to the internal capital markets literature by shedding light on the importance of CEO compensation structure in internal capital allocation efficiency. We contend that if the costs to headquarters (HQ) managers for misallocating corporate resources are made prohibitive, or at least greater than the associated private benefits, then the managers are much less likely to engage in value destroying internal capital misallocation decisions. Executive compensation can be a powerful mechanism to achieve this goal of aligning HQ managers' and shareholders' interests, and hence making it costly for these managers to misallocate capital among the various divisions of the firm. 1 It therefore begs the important, yet unaddressed, question in the internal capital markets literature as well as the vast body of literature on diversification discount: what is the role of CEO compensation in reducing agency conflicts that cause internal capital misallocation and shareholder value destruction in multi-segment firms? In other words, does CEO incentive compensation improve internal capital market (ICM) efficiency? We believe that the answer to this question is important in finding a solution to improving the efficiency of internal capital markets and thereby stemming value destruction in multi-segment firms. Given the importance of inter-divisional capital allocation efficiency in corporate value creation, the study of internal capital markets has been the focus of many prior studies in the finance literature. The question of whether there are efficiency gains from internal capital markets remains controversial. Compelling arguments are made that support both sides of the issue. Williamson (1986) makes the case that diversification and establishment of an internal capital market will allow better sharing of inside information and more efficient allocation of capital among competing investments within the firm because information asymmetry and agency costs will render financing from external capital markets either inefficient or prohibitive (see also Alchian, 1969 and Williamson, 1970). A similar line of reasoning predicting efficiency gains from internal capital markets is adopted by Weston (1970), Gertner et al. (1994), Stein (1997) and Matsusaka and Nanda (2002). Maksimovic and Phillips (2002) provide empirical evidence that diversified firms allocate resources efficiently, while Hadlock et al. (2001) conclude that diversification improves access to external capital markets. The opposing side of the debate on efficiency gains/losses from internal capital markets allocations suggests that diversification leads to inefficient investment (capital allocation) decisions within the different segments because of managerial agency problems and this results in a decline in firm value (e.g. Lang and Stulz, 1994 and Berger and Ofek, 1995). The general theme in this literature is that conglomerate firms destroy value due to the existence of two types of agency conflicts; one between the corporate managers at headquarters and shareholders, and the other between HQ managers and rent-seeking divisional managers. In this framework, the HQ managers (i.e. the CEO) derive private benefits of control from all divisions whereas the divisional managers extract private benefits from their divisions only. Several studies support the view that value destruction in multi-segment firms is due to misallocation of internal capital (see Meyer et al., 1992, Rajan and Zingales, 1996, Lamont, 1997, Shin and Stulz, 1998, Scharfstein, 1998 and Rajan et al., 2000; and Scharfstein and Stein, 2000). Scharfstein and Stein (2000) and Rajan et al. (2000) develop theoretical models of internal capital market based on agency conflicts. Scharfstein and Stein incorporate the two types of agency conflicts in their model to explain misallocation of resources and rent-payment by the CEO to the divisional managers who receive unjustifiably more resource allocation for their divisions. Further, Shleifer and Vishny (1989) argue that managers can use diversification to entrench themselves by engaging in manager-specific investments. The two types of agency conflicts discussed above manifest as “socialism” in allocation of internal capital and parochial rent-seeking/lobbying behavior by self-serving divisional managers. More specifically, CEOs can extract private benefits of control by over-investing free cash flow for empire-building (Jensen, 1986), engaging in inefficient cross-subsidization (Lamont, 1997 and Shin and Stulz, 1998; and Scharfstein, 1998), funding value destroying “pet” projects (Shin and Stulz, 1998), and giving in to rent-seeking by divisional managers. It is noteworthy that rent-seeking can be more of a problem with managers of weaker divisions because they face a relatively lower opportunity cost of spending their time and effort lobbying the headquarters (see Scharfstein and Stein, 2000). In addition, internal capital markets give the CEOs the ability to avoid monitoring from external financial markets allowing diversified firms to undertake inefficient investments.2 While all of the aforementioned agency-based factors have been identified as causes of value destruction in multi-segment firms, previous studies are silent on the important empirical link between CEO incentive compensation that captures the degree of HQ manager-shareholder agency problem and the efficiency of internal capital markets. Executive incentive compensation, by aligning manager-shareholder interests, can influence corporate decision-making resulting in more efficient internal capital allocation. We contend that resolving the first type of agency conflict, which exists between the CEO (HQ managers) and the shareholders, lies at the heart of stemming value destruction in multi-segment firms. We reason here that if the interest alignment between the CEO and the shareholders is strong, then the cost to the CEO of misallocating corporate resources by giving in to the rent-seeking and distortionary lobbying efforts of the divisional managers will be prohibitive relative to any private benefits that may accrue to the CEO.3 This study therefore focuses on the role of CEO incentive compensation in internal capital allocation efficiency.4,5 Clearly, the above logic is based on the implicit assumption that CEO's derivation of private benefits is increasing in internal capital misallocation, as suggested by the Scharfstein and Stein (2000) model. However, most other theoretical models assume that while the CEO derives private benefits from investments, these benefits are not increasing in internal capital misallocation (see Stein, 1997 and Rajan et al., 2000). These studies argue that the CEOs have an incentive to optimally allocate capital across divisions so that they can consume more in private benefits. Therefore, another important contribution of our study is that by empirically examining whether private benefits derived by HQ managers are positively linked to internal capital misallocation, we can distinguish between these alternative assumptions about the relation between private benefits and investment misallocation. For a sample of 1311 diversified-firm years during the period 1992–2003, we document compelling evidence supporting our central hypothesis that managerial equity-based incentives play an important role in more efficient allocation of internal capital. Our results also underscore the importance of differentiating between various types of equity-based compensation because we find that they have very different effects on internal capital allocation efficiency. Our findings show that CEO stockholdings have a significant influence in enhancing internal capital market efficiency, while options compensation surprisingly does not emerge as a significant determinant of internal capital market efficiency. Collectively, these findings suggest that better alignment of CEO (HQ managers) incentives with shareholders interests result in more efficient internal capital allocation. Our results also suggest that private benefits by managers at HQ are indeed positively related to internal capital misallocation and supports Scharfstein and Stein's (2000) assumption. For completeness, we also explore the relationship between CEO incentive compensation and excess value of a diversified firm. These results complete the circle by linking our main finding that CEO incentive compensation has a strong positive influence on internal capital market efficiency, which in turn manifests in higher excess firm value. The rest of the paper is organized as follows. In Section 2 we present the sample formation process and data description. Section 3 delineates the different measures of internal capital market efficiency and various measures of CEO incentive compensation used in the analysis. The empirical findings are presented in Section 4. Conclusions follow.

This study examines the link between CEO incentive compensation and internal capital market efficiency. We document compelling empirical evidence supporting our central hypothesis that equity-based incentives of headquarters manager (CEO) play an important role in more efficient allocation of internal capital. Thus, the “dark side” of internal capital markets casts its shadow on firms where the CEOs have little equity based incentives. Another facet of this study is that it enables us to discriminate between different theoretical models of internal capital allocation in multi-segment firms. Specifically, our analysis suggests that private benefits derived by CEOs are increasing in internal capital misallocation as depicted in Scharfstein and Stein (2000) model. Examining effects of the sensitivities of stock and options that make up the CEO's total equity-based compensation package, we find that the CEO's stock ownership sensitivity is a significant factor that enhances internal capital allocation in a multi-segment firm. However, surprisingly we do not find that the stock option sensitivity has any influence on internal capital allocation efficiency. We also document a positive link between CEO incentive compensation and excess value of diversified firms. These results are consistent with our findings linking CEO incentive compensation and ICM efficiency. Overall, our study contributes to the ICM literature and the literature on diversification discount in multi-segment firms.