The Bright Side of Internal Capital Markets

Authors: Khanna, Naveen¹; Tice, Sheri²

Source: The Journal of Finance, Volume 56, Number 4, August 2001 , pp. 1489-1528(40)

Publisher: Blackwell Publishing

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Abstract:

We examine capital expenditure decisions of discount firms in response to Wal-Mart's entry into their markets. Before Wal-Mart's entry, focused incumbents and discount divisions of diversified incumbents are similar in size, geographic dispersion, and firm debt levels. However, discount divisions of diversified firms are significantly more productive. After Wal-Mart's entry, diversified firms are quicker to either “exit” the discount business or “stay and fight.” Also, their capital expenditures are more sensitive to the productivity of their discount business. Internal capital markets function well, as transfers are away from the worsening discount divisions. It appears diversified firms make better investment decisions.

Document Type: Original article

DOI: 10.1111/0022-1082.00377

Affiliations: 1: Eli Broad College of Business, Michigan State University, 2: A.B. Freeman School of Business, Tulane University

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