Internal Capital Market In Business Group

This paper investigates the relationship between internal capital market and agency problem. It complements the existing literatures by analyzing the internal capital market and agency problems between ultimate controlling shareholder and minority shareholders. Internal markets in combination with the typically complex ownership and control structure of group-affiliated firms may lead to greater agency problems. This paper investigates this problem in a case of the Taiyue business group. The relative importance of the benefits of internal markets, the agency costs associated with corporate groups, and the relationship of these benefits and costs with specific firm characteristics are the issues investigated in this paper. I find that the internal capital market in Taiyue business is ineffective. The ultimate controlling shareholder uses the internal capital market to tunneling and propping and the agency problem is more serious.