Dual-level Internal Capital Market In Pyramidal Business Group

Exploring functions and operating mechanism of internal capital market (ICM) inside conglomerates are the key of improving ICM efficiency and value promotion of business groups. Previous researches on ICM only focus on the ICM between large shareholders and listed parent companies, or the ICM between listed parent companies and their subsidiaries, while assuming that they are same in functions and operating mechanism. However, existing researches ignore the difference in principal of control and incentive between two ICMs. From the perspective of organization structure and interests relationship, this paper exams the difference in operating mechanism and functions between two ICMs inside pyramidal-structure conglomerates, thus deepen the understanding of ICM.This paper fully reviews existing foreign and domestic researches on ICM and analyzes the theoretical foundation of dual-level internal capital market in pyramidal conglomerates; then takes China National Building Materials Group Corporation as an example, and analyzes the function and operation mechanism of the upper and lower internal capital market by using data of related transactions from2009to2014.This paper shows that:(1) internal capital market in pyramidal conglomerates has two levels.(2) The operation mechanism is different between the upper level ICM formed by listed parent company and big shareholders and the lower level ICM formed by listed parent company and subsidiaries. Upper level ICM operates under the rule of "strategy landscape", while lower level of ICM operates under the rule of "primary business".(3) The function is different between two ICMs. Upper level ICM focuses on creating group financing vehicles to optimize capital allocation, while lower level ICM pays more attention to improve liquidity of daily business operation and investment in subsidiaries.Innovation of this paper:Based on the background that more and more conglomerates use pyramid structure, this paper analyzes the operating mechanism and function of different levels of internal capital market by comparing capital-allocation in the upper ICM and lower ICM. This study provides a new perspective to investigate the function and operation of ICM in the pyramidal structure, as well as supplies theory support to the operation of internal capital market in a conglomerate.