Understanding Internal Capital Markets and Corporate Policies

M. Cremers, R. Huang, Z. Sautner

Research output: Working paperDiscussion paperOther research output

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Abstract

This study looks inside a large retail-banking group to understand how corporate politics affect internal capital allocation. The group consists of a headquarters organization and about 150 member banks which own the headquarters. Our data is from the firm’s managerial accounting system and covers all cash flows, internal capital transfers, and investments at the local member bank level. We first show that a member bank’s investment (net loan growth) is generally not fully independent from its own cash flow (net deposit growth). Then we show that such constraints are not apparent at more influential member banks, where influence is measured by the divergence of voting rights from ownership rights. The more influential banks are allocated more funds from the headquarters, but also show more restraints in investments when experiencing large deposit inflows. Influence matters more among member banks requiring more information exchanges with the headquarters as a result of more volatile funding requests. Influence also matters more for small business loans, which contain more soft information, than for standardized residential mortgage loans. These results suggest that corporate politics can be used to address allocation inefficiencies resulting from information asymmetries between the headquarters and divisions (member banks in our case).
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages57
Volume2009-47 S
Publication statusPublished - 2009

Publication series

NameCentER Discussion Paper
Volume2009-47 S

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Corporate policy
Internal capital markets
Headquarters
Deposits
Cash flow
Loans
Information asymmetry
Ownership
Capital allocation
Investment banks
Accounting systems
Soft information
Mortgage loan
Voting rights
Small business loans
Divergence
Funding
Inefficiency
Information exchange
Retail banking

Keywords

  • internal capital markets
  • capital markets
  • retail banking
  • corporate politics

Cite this

Cremers, M., Huang, R., & Sautner, Z. (2009). Understanding Internal Capital Markets and Corporate Policies. (CentER Discussion Paper; Vol. 2009-47 S). Tilburg: Finance.
Cremers, M. ; Huang, R. ; Sautner, Z. / Understanding Internal Capital Markets and Corporate Policies. Tilburg : Finance, 2009. (CentER Discussion Paper).
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Cremers, M, Huang, R & Sautner, Z 2009 'Understanding Internal Capital Markets and Corporate Policies' CentER Discussion Paper, vol. 2009-47 S, Finance, Tilburg.

Understanding Internal Capital Markets and Corporate Policies. / Cremers, M.; Huang, R.; Sautner, Z.

Tilburg : Finance, 2009. (CentER Discussion Paper; Vol. 2009-47 S).

Research output: Working paperDiscussion paperOther research output

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Cremers M, Huang R, Sautner Z. Understanding Internal Capital Markets and Corporate Policies. Tilburg: Finance. 2009. (CentER Discussion Paper).