Abstract
The paper examines the capital allocative behavior of internal capital market (ICM) members and their comparable single-segment firms in the euro area. Results indicate that the ICM members exhibit lower investment-cash flow sensitivity, lower impact of financial flexibility, and lower levels of underinvestment and overinvestment behavior, than their peers. We find no evidence of significant value-destroying cross-subsidization within ICMs. Results document that headquarters’ monitoring and managerial discretion, cost of capital, financial flexibility, informational asymmetries and asset lumpiness appear to be significant determinants of investment behavior.
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