Internal capital markets and managerial power: implications for family groups

Written on 07 November 2014.


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Internal capital markets and managerial power: implications for family groups.

Despite the dominance of family firms, most academic research is not targeted to them and they remain largely unknown in the literature. Research regarding the specificities of management and governance practices of family firms is especially scarce. The EDHEC Family Business Center undertakes research on management quality within family firms, developing issues such as governance, management, succession, finance and family business role in society.
Internal capital markets and managerial power: implications for family groups
Lopez-de-Silanes, F. (2014)
Abstract
Capital allocation is a central issue for family firms as their access to external resources is typically lower and thus exerting further pressure to optimally allocate capital among competing business units. So, how do firms allocate resources across business units? The main contribution of this publication is to empirically document whether managerial power and connections make a difference to internal capital allocations, and if so, under what circumstances. In this paper, new direct evidence is used from the internal accounting system of a large multinational conglomerate containing information about planned and actual capital allocations to its 20 business units. There are three main results that emerge from this empirical analysis. First, managers across business units use the standardized budgeting process to build buffers into their budgets. Second, although all unit managers try to use excessive capital budgets to justify additional spending, units run by more powerful and better connected managers obtain higher actual capital allocations at times of financial slack after unexpected firm cash windfalls. Third, the effects of power on internal capital allocation reflect inefficient resource allocations and do not lead to improved unit performance. Overall, to the extent that the management teams of family firms and family groups are structured in such a way that differences in power and connections may become more important, these findings are of particular importance as they strive to improve their capital allocation and other internal processes.
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