| This study tests the proposition that firms that make efficient use of their internal capital markets can lower the cost of transacting in the external capital market. Using a large panel data set of diversified firms from 1980--1998, I show that efficient internal capital market users and more diversified firms have a higher propensity to use external capital relative to comparable single segment firms. These results are robust to including other controls, such as measures of information asymmetry, capital needs, relative valuation and firm size. Further, a higher use of external capital by diversified firms relative to single segment firms is associated with a higher excess value, especially for efficient internal capital market users. I also demonstrate the robustness of these findings by employing a sample of firms that experience an increase in expected investment outlays. My findings support predictions from theoretical models, such as Stein (1997), and emphasize an additional benefit of an efficient internal capital market, namely lower-cost access to external capital. |
