محدودیت های مالی و کارایی سرمایه گذاری: تخصیص سرمایه داخلی در سرتاسر دوره های تجاری

The extent to which conglomerates face frictions in external capital markets has implications for their internal capital allocation. We find that, during recessions, when external financing costs are higher, conglomerates improve the efficiency of internal capital markets by increasing the allocation of funds to high q divisions relative to low q divisions. The improvement is significantly higher for conglomerates that are likely to face more binding financial constraints. This evidence suggests that although financial constraints impair managers’ ability to undertake positive net present value projects, they improve the quality of project selection by reducing free cash flow and pressuring managers to fund the more valuable investment opportunities. It is consistent with theories stressing the benefits of internal capital markets in the presence of external capital market imperfections.

Unlike focused firms, conglomerates have internal capital markets, which give them the opportunity to transfer a given amount of capital between segments avoiding the frictions in external capital markets. Such financial flexibility can be beneficial or detrimental to a firm’s investment efficiency. A potential efficiency-enhancing benefit of capital transfers is the possibility to finance profitable investment projects that may not get financed through external capital markets due to information asymmetries (Myers and Majluf, 1984 and Greenwald et al., 1984) or agency problems (Jensen and Meckling, 1976, Grossman and Hart, 1982 and Jensen, 1986). This line of argument, proposed by Alchian, 1969 and Weston, 1970, has been further developed by Williamson, 1975, Gertner et al., 1994 and Fluck and Lynch, 1999. However, the flexibility to redistribute funds may also lead to overinvestment in poor projects at the expense of good ones due to various agency problems described in the previous literature (Scharfstein and Stein, 2000 and Rajan et al., 2000). In this paper, we examine whether a firm’s capacity to raise financing affects how efficiently it distributes the available capital between alternative investment projects. We argue that, other things equal, capital is likely to be allocated more efficiently when it is more difficult to obtain. Easy access to external capital and free cash flow are expected to aggravate the allocation inefficiencies that exist within the conglomerate structure by facilitating investment spending. When managers are not pressed to set priorities or invest time in project selection, they are more likely to invest in positive net present value (NPV) projects, as well as negative NPV projects that are of special interest to them (Jensen, 1986 and Stulz, 1990). This can lead to lower efficiency of internal capital markets. As shown theoretically by Matsusaka and Nanda (2002), at some level of resources when all desired projects can be funded, the agency costs of overinvestment may dominate the value of the real option to reallocate funds. Financial constraints restrict the amount of capital under managers’ discretion and restrain them from pursuing investment opportunities. This impairs their ability to undertake positive NPV projects. However, to the extent managers’ private benefits are correlated with the profitability of investments, financial constraints can also lead to higher standards of project selection and more efficient internal capital markets. Specifically, managers can selectively alleviate the negative impact of financial constraints on higher value projects by increasing their priority in financing. Given a limited amount of capital, they can use the flexibility provided by internal capital markets to reallocate funds from lower quality projects to higher quality projects, which has been formalized as “winner-picking” and “loser-sticking” by Stein (1997). While financial pressure may benefit some conglomerates by reducing overinvestment, it may hurt other conglomerates by creating underinvestment. However, under both scenarios, it is expected that the allocation of capital to projects with lower marginal values will decrease relative to projects with higher marginal values, which will lead to more efficient internal capital markets. To test the empirical relationship between financial constraints and internal capital markets, we study a sample of multidivisional firms between 1980 and 2008. Using segment-level data we examine their internal capital allocation policies in financially constrained versus financially relaxed states. Based on our main hypothesis, conglomerates are expected to increase the allocation of capital to their high q segments relative to low q segments when they face tighter financial constraints. The severity of financial constraints faced by a firm is to some extent endogenous with respect to its investment policies. For example, inefficient internal capital allocation and high potential of overinvestment may lead to higher costs of external financing. However, this possibility is expected to lead to a negative relationship between internal capital market efficiency and financial constraints and, therefore, will contribute negatively to finding support for the advanced hypothesis. Also, to further mitigate this problem, we identify financially constrained states based on recessions and monetary contractions, which represent adverse liquidity shocks that are exogenous with respect to firms’ investment policies. A number of studies show that firms face significantly tighter financial constraints during recessions and monetary contractions due to the erosion of their balance sheets and the reduced supply of bank financing (Bernanke and Blinder, 1988, Bernanke and Gertler, 1995 and Bernanke et al., 1996). Consistent with this view, we find that the conglomerates in our sample are significantly more constrained during recessions than non-recession periods. In particular, during recessions, they experience a substantial decline in the growth rates of capital expenditures, inventory, assets, and sales. Also, their sensitivity of investment to internally generated cash flows is significantly higher compared to that in non-recession periods. The decline in investment, accompanied by higher dependence on internal funds, suggests that even if the demand for growth may be lower in recessions, it is constrained by the availability of capital. However, while under financial constraints, conglomerates do not equalize the impact of the liquidity shortfalls across segments. Instead, they use their internal capital markets to save the budgets of their higher growth investment projects. Based on a firm-adjusted measure of capital allocation, during non-recession periods, high q divisions receive significantly more financing compared to low q divisions, which is not surprising considering the differences in industry growth opportunities. However, based on industry-adjusted and firm- and industry-adjusted measures, during non-recession periods, high q segments are allocated less capital, although insignificantly, than low q segments, which suggests that internal capital markets are not efficient. During recessions, conglomerates modify their capital allocation policies in favor of high q segments. Based on all three measures of capital allocation, transfers to high q segments increase significantly and transfers to low q segments decrease significantly compared to their non-recession levels. Also, based on all three allocation measures, during recessions, high q segments receive significantly more capital relative to low q segments. These results hold strongly in a multivariate analysis when we control for firm and segment characteristics. The examination of changes in segment growth opportunities indicates that the observed changes in resource allocation are not driven by a larger decline in growth opportunities for low q segments compared to high q segments that could happen during recessions. Further, the increased levels of capital allocation to high q segments, relative to low q segments, translate into significantly higher efficiency of internal capital markets on firm level. Based on a firm-level estimate of efficiency, internal capital markets are inefficient, in general, and during non-recession periods, which is consistent with the prior findings on the nature of cross-subsidization. However, conglomerates increase the efficiency of capital allocation significantly as they enter a recession. The increase in efficiency holds in a multivariate analysis when we control for the relevant firm characteristics, such as firm size, level of diversification, and diversity of segment growth opportunities. Our cross-sectional analysis provides further support for the notion that the change in internal capital market efficiency is induced by financial constraints. Based on dividend payout, firm size, commercial paper rating, and KZ index, we identify conglomerates that are ex ante constrained or bank-dependent, which makes them more vulnerable to the macroeconomic liquidity shocks. Previous research shows a disproportionate impact of recessions and monetary contractions on firms with limited access to capital markets and balance sheet constraints (Bernanke and Blinder, 1988, Bernanke and Gertler, 1989, Stiglitz and Weiss, 1981, Gertler and Gilchrist, 1993, Gertler and Gilchrist, 1994 and Kashyap et al., 1994). We find that, under all four classification schemes, the improvement in internal capital market efficiency is disproportionately concentrated among conglomerates that are classified as constrained. With limited access to external capital, these conglomerates can protect the budgets of divisions with more valuable investment opportunities by decreasing the allocation of capital to divisions with less valuable investment opportunities. Although unconstrained conglomerates also exhibit changes in capital allocation towards higher efficiency, these changes are weaker or insignificant. Since unconstrained conglomerates are able to more easily substitute bank credit with alternative sources of financing such as public security issues, changes in capital market conditions are less consequential for them in terms of capital allocation policies. These results strongly support the hypothesis that internal capital markets are more efficient when conglomerates face tighter financial constraints. They also imply that a positive side-effect of economic recessions may be a potential increase in the efficiency of internal resource allocation. It is important to note that our results do not suggest that financial constraints are an overall positive factor for funding valuable investment opportunities. They simply suggest that, to the extent their incentives are aligned with those of shareholders, managers will increase the priority given to more profitable investment opportunities when they are faced with binding financial constraints. It is still likely, however, that, despite less efficient capital allocation, valuable investment opportunities are financed more successfully under more accessible external capital markets. The rest of the paper is organized as follows. Section 2 reviews the related literature. Section 3 describes the sample and data. Section 4 assesses the severity of financial constraints faced by conglomerates during recessions and non-recession periods. Section 5 presents the segment-level tests of financial constraints and internal capital allocation. Section 6 presents the firm-level tests of financial constraints and internal capital market efficiency. Section 7 concludes.

This paper provides evidence on the relationship between financial constraints and the efficiency of internal capital markets of diversified firms. We investigate the patterns of capital allocation between high growth and low growth conglomerate segments and the overall internal capital market efficiency across the business cycle and across constrained and unconstrained conglomerates. We find that during non-recession periods, when external capital markets are easier to access, internal capital markets tend to be inefficient, as conglomerates allocate more funds to segments with low growth opportunities relative to segments with high growth opportunities. During recessions, when external capital markets are more restrictive, conglomerates significantly enhance the efficiency of internal capital markets by shifting more capital to high growth segments relative to low growth segments. This effect is significantly stronger for conglomerates that are ex ante financially constrained, since the liquidity shocks caused by recessions are more binding for them. Such improvement in capital allocation does not require that conglomerates transfer more cash flows generated by low q segments to high q segments. It can also happen if managers cut down on discretionary investments that they were able to indulge in when the firm was able to raise more capital. Irrespective of the underlying reason, the evidence shows that under low levels of liquidity, the standards for project selection improve significantly. Our findings suggest that while the agency problems on different levels of corporate hierarchy tarnish internal capital markets, the benefits of the flexibility to reallocate capital between projects become more important when external capital markets are less accessible. Our findings also draw attention to a potential positive effect that economic recessions can have on the internal allocation of corporate resources.