| This dissertation analyzes the process of capital allocation in internal capital market within the corporation by corporate headquarters from the aspects of information production, investment monitoring and performance measurement and control. Some suggestions have been made for corporate headquarters so as to improve the efficiency of internal capital market. For the above-mentioned purpose, the paper is divided into three parts: Part I, chapter 1 and chapter 2, is an introduction and gateway to our focus. Part II, chapter 3,4,5,6 is the body of theoretic analysis. Part III, chapter 7,8 , is the empirical analysis. Chapter 9 concludes the paper, and examines some potential avenues for future research.Chapter 1, reviews relevant and heuristic literature in internal capital market, and points out the limitation of the current research. It is helpful for us to understand the behavior of capital allocation within the corporation practically by studying the influence of information cost on information acquisition and using for decision-making, imperfection of the supervision technology on monitoring effectiveness and efficiency of organization through eliminating the presumption of complete and cheap information, as well as the perfection of the supervision technology.Chapter 2, the theoretic foundation of the paper, discusses the effects of asymmetry information and agency cost on corporate investment. An internal capital market is required as a "visible hand" to carry out the function of "invisible hand" in such situations, all else equal, where the external capital market is underdeveloped, either because of weaknesses in the legal and contracting environment, inadequate accounting and disclosure practices, etc.Chapter 3, firstly discusses the reason and essence of the internal capital market. The reason is that traditional capital market failed, and theessence is that conglomerates is substitute for market. The efficiency of the internal capital market is the foundation if its existence. So on the basis of the argument of internal capital market by Alchian(1969), Williamson(1970),under the presumption of complete and cheap information, as well as the perfection of the supervision technology, the author examines the credit rationing and under-investment due to information asymmetries and agency conflicts of external finance, which lead outside investors unable to make investment contingent on the state, could be alleviated when capital is allocated within firms via an internal capital market in a corporation. Internal capital market is a better mechanism of capital allocation by a mutual arrangement between parent corporation and its subsidiary companies or divisions.Chapter 4, by eliminating the first presumption of complete and cheap information in Chapter 3, analyzes the influence of information cost on information acquisition and using for decision-making. Firstly, this part discusses the relationship among information cost, scale of firm and the efficiency of decision-making so as to show the necessity of delegation. It is also institutional base on which the corporate headquarters could get the complete and cheap information. And then, it gives correspondent conditions on delegation of information production to solve the problem of how to delegate. The results also show that delegation is better than centralization on certain condition. And a good system of delegation plays a important role on improvement of efficiency decision-making and effectiveness of internal capital market.Chapter 5, by eliminating the second presumption of perfect monitoring in Chapter 3, discusses the influence of the imperfection of the supervision technology on monitoring effectiveness and efficiency of organization. The results show that the monitoring system is validity as long as the imperfection of the supervision is limited on allowed condition. Especially, to employ monitoring agents, the monitoring skill of the principal could be improved and extended. And also the incentivesfrom the principal could be transferred through the layers of the hierarchy to provide motivation for the agents to choose the high effort. The incentive compatibility of monitoring system is maintained. Then the paper analyzes unofficial behavior of the supervisor and his influence of on efficiency of organization. The results show that the efficiency of organization get lower. So, to deter the unofficial behavior of the supervisor and improve efficiency of organization, the corporate headquarters must reduce the supervisor discretion, improve the supervision technology, introduce more rules, enhance process management and key point control. A complete performance measurement and control system is also required.Chapter 6, firstly analyses the influence of performance measurement on capital allocation. The results show that it is feasible to require agent to maximize the value of measure by firm headquarters to influence of decision of agent. The investment distortion could be alleviated by project performance measurement which is consistent with project value. Then the paper develops a model to analyse the influence of the related measures, agent effect on trading off the performance measure, and gives the principle on trading off the performance measures. Secondly , by analyzing the particularity of capital allocation of business group and the limitation of performance measurement, the paper develops a sunflower multi-control system so as to connect corporate strategy, performance measurement and capital allocation together, to lead and stimulate managers to allocate capital efficiently.Chapter 7 firstly reviews the practice of internal capital market in countries all over the world. The results show that the benefit from internalizing could be increased through the decrease of market cost by operation of internal capital market, and the delegation is often used by headquarters on considering agency cost and information cost. Strategic control is more popular as the scale of firm is extended and gives the practical foundation for the application of sunflower multi-control systemsuggested in Chapter 6. Secondly the part supplies a case of operation of internal capital market of a listing company in China. The results show that the credit rationing could be alleviated via an internal capital market in a corporation. It coincides with results of our theoretic analysis.Chapter 8 reviews the mechanism of capital allocation in internal capital market of ABC company, and also develops a sunflower multi-control system for ABC company. The results show that it is in accordance with the expected object.
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