Research On The Internal Capital Market Allocation Efficiency

Internal capital market is an indispensable part of capital allocation process for itsadvantages under the condition of imperfect external capital market. Since1990s, our country’senterprise groups have sprung up like mushrooms. Does internal capital market exist in ourcountry’s enterprise groups, how is its allocation efficiency, what factors may influence itsallocation efficiency, these questions are what the paper wants to solve about. In addition, inorder to change the present situation that researches on internal capital market have differentjudgement on it, this paper tries to summarize the definition of internal capital market and findthe way to determine it.The paper summarizes the definition of internal capital markets and discusses itsdetermination method by using the method of literature analysis and theory reasoning. By usingcash flow sensitive coefficient method, the paper describes the allocation efficiency of theinternal capital markets in our country’s enterprise groups. Finally, this paper uses empiricalmethod to research the existence of internal capital market and factors that influence allocationefficiency of internal capital market in China.The empirical research comes to the following conclusions: first, there are active internalcapital markets in our country’s enterprise groups; second, the proportion of enterprise groupsthat have an internal capital market which can allocate capital efficiently is not high, between50%and60%; Third, the separating factor between controlling shareholder’s cash flow abilityand its control right shows negative correlation relationship with internal capital marketallocation efficiency. The number of listed companies in an enterprise group shows a inverted Ushaped relationship with internal capital market. Degree of diversification shows an U shapedrelationship with internal capital market. According to the research’s conclusion, this paper putforward some policy recommendations like perfecting the listed company information disclosuresystem, strengthening the supervision of related party transactions and perfecting legislation toprotect small and medium investors.