Allocation Efficiency And Its Consequences Of Internal Capital Market In Chinese Business Group

Business groups are ubiquitous in emerging markets and play an important role.Governmental institutions often intervene and even directly participate in economic activities using administrative tools or national plan,which result in failures or imperfections of system of contract enforcement and other trading system in market.As an important institutional arrangement,business group can overcome the defects of external undeveloped capital markets,reduce transaction cost,and achieve the integration of resources and resource sharing in group members.Through internal capital market,group headquarter allocated internal funds within group member firms,and the optimization of allocation can contribute to maximization of group overall interests.As a result,the key of study of group governance is to investigate how internal capital market allocates internal funds.Which goals does capital allocation want to achieve?What are the determinants and economic consequences of capital allocation within group?As transitional economies and emerging markets,China context may also provide some special perspectives that differ from those findings in developed countries.Based on China's specific transformational background,this study integrates two competing views of internal capital market:efficiency theory and inefficiency theory.There are three components of this study:efficiency of capital allocation,factors affecting the efficiency of capital allocation,and the economic consequences of allocation of capital allocation.We focus on these three questions and want to uncover the black box of Chinese business group by providing empirical evidences.Specifically,"efficiency of capital allocation" refers to how group headquarter allocate internal funds within group members."Factors affecting the efficiency of capital allocation" refer to the corporate governance factor that will influence headquarters' allocation behavior."Economic consequence" refers to the impact of internal capital allocation on group member firms.The main findings are listed as follows:(1)The allocation of internal capital in SOE proceeds in line with the "socialist subsidies" model,and the member firms with better profitability cross-subsidize the member firms with poor profitability.The allocation of internal funds in private firm functions in line with "winner-picking" pattern,and the capital flows from member firm with poor performance to member firm with better performance.Overall,the allocation of internal capital is inefficient in SOE and efficient in private firms.We also find that SOE improves efficiency when the proportion of private ownership increase and private firms reduce efficiency with the increase of state ownership.(2)In SOE group,the lobbying behavior of member firms will reduce allocation efficiency.We find that allocation efficiency is lower when group adopt interlocking directorates within group and the short geographic distance between member firms and headquarters.In private-owned business group,the hiring of professional managers increases the allocation efficiency compared with hiring of family members.(3)The internal capital market can alleviate member firms' financial constraints,enhance the efficiency of investment,and further increase firm value.Especially,internal capital markets in tightening monetary policy have more incentives to ease member firms'financial constraints and enhance member firms' market performance.(4)The presence of internal capital market makes the firm more opaque,which reduces the accuracy of analyst forecast.But internal connections between member firms mitigate the negative association.Meanwhile,the scale of internal capital market is negatively associated with stock price synchronicity.And the improvement of institutional investor's shares and the number of analyst numbers weaken the negative association.We try to fill some gaps in internal capital market literatures.First,we find that firm's ownership is an important factor which can reconcile the bright side and dark side of internal capital market.The existing framework lacks the comparison of business group with different ownership.Secondly,we suggest that member firms' lobbing behavior reduce allocation efficiency in SOE group and family control also exert a negative impact on allocation efficiency in private firms.We further suggest that the external capital market complements the functions of internal capital market.Thirdly,different from the prior studies,we employ macro-institutional experiment and find the different impacts of internal capital market on group member firms in different monetary policy.Finally,we extend the research of economic consequence to capital market intermediary and stock price synchronicity and contribute to related researches.