The Role of Commonality between CEO and Divisional Managers in Internal Capital Markets

We study the role played by the informal links, or “connections,” between the chief executive officer (CEO) and the divisional managers of conglomerate organizations. Using data on a large sample of multisegment U.S. corporations from 1996 to 2004, we show that segments run by connected managers rec...

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Bibliographic Details
Published in:Journal of financial and quantitative analysis 2011-06, Vol.46 (3), p.841-869
Main Authors: Gaspar, José-Miguel, Massa, Massimo
Format: Article
Language:English
Subjects:
Business management
Business structures
Capital market
Capital markets
Cash flow
Chief executive officers
Conglomerates
Debt
Financial investments
Firm theory
Investment strategies
Management
Management education
Middle management
Resource allocation
Sensitivity
Subsidiary companies
Trust
U.S.A
Value
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Summary:We study the role played by the informal links, or “connections,” between the chief executive officer (CEO) and the divisional managers of conglomerate organizations. Using data on a large sample of multisegment U.S. corporations from 1996 to 2004, we show that segments run by connected managers receive more investment and exhibit lower sensitivity to cash flow shortfalls (and exhibit higher sensitivity to other segments’ cash flow). At the firm level, having more connected managers presiding over segments with high Tobin’s Q improves resource allocation and increases firm value. These findings are consistent with the hypothesis that the mutual trust associated with connections reduces the need for wasteful reallocation of resources across divisions of conglomerate firms.
ISSN:0022-1090
1756-6916
DOI:10.1017/S0022109011000111