Abstract
We examine the effects of internal information asymmetry between corporate headquarters and division managers on internal capital market efficiency and firm value. Using a novel measure of internal information asymmetry − the differential insider trading profit between division managers and top executives, we find a negative relation between internal information asymmetry and both internal capital market efficiency and firm value. These relations are more pronounced for firms with weaker corporate governance. Higher internal information asymmetry also associates with a greater probability of divesting and with more positive shareholder wealth effects from refocusing events.
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