Internal Capital Market Activeness

27 October 2009 at 9:22 am Lasse 3 comments

| Lasse Lien |

In these Williamsonian times, here is a nice new working paper relevant to his internal capital market hypothesis. The paper measures, in various ways, how active a firm is in reallocating capital across its businesses. The paper finds that the more active a firm is, the lower the firm’s industry-adjusted profitability tends to be. This of course raises the question of whether active internal capital markets cause inferior performance, or whether inferior performance causes active internal capital markets. Using an impressive battery of robustness checks the authors conclude that internal capital markets are inefficient.

If the subject appeals to you, you have presumably already read this and this.

Entry filed under: - Lien -, Recommended Reading, Theory of the Firm.

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3 Comments Add your own

1. Specification Skeptic | 27 October 2009 at 6:36 pm

Wow. Warren Buffett is practically the poster child for wealth destruction, then. He even goes so far as to say that Berkshire Hathaway’s core advantage — and his own superpower — is allocating capital internally. GE’s done soooo poorly, too.

Oh, wait…what’s that, you say? “Activity” means “frenetic reshuffling of the same capital,” not “volume of dollars moved, thoughtfully, to their best opportunities”? Perhaps weighting this by dollars rather than by firms would be a good idea.
2. D. J. Schlenker | 28 October 2009 at 3:18 pm

One of the links in this post appears to be a dead-end . . .

(the 2nd “this” in “you have presumably already read this and this”)
3. Lasse | 28 October 2009 at 6:32 pm

Thanks DJ. The link has been fixed.
To skeptic: Read the paper. The authors do not claim that Buffet is an idiot, but that the expected gain from trying to be or become the next Buffet appears to be negative. How would you sign it?