Are Internal Capital Markets Good for Innovation?

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Are Internal Capital Markets Good for Innovation?

Please use this identifier to cite or link to this item: http://hdl.handle.net/10355/8913

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dc.contributor.author Klein, Peter G.
dc.date.accessioned 2010-10-27T15:00:48Z
dc.date.available 2010-10-27T15:00:48Z
dc.date.issued 2007-7-15
dc.identifier.uri http://hdl.handle.net/10355/8913
dc.description.abstract Which type of firm is more innovative: the decentralized, diversified corporation or the smaller, more narrowly focused “entrepreneurial” firm? According to one argument, diversified corporations can do more R&D because their operating units have access to an internal capital market. Other writers argue that decentralized, diversified firms over-rely on financial accounting criteria to evaluate the performance of their operating units, discouraging divisional managers from investing in projects like R&D with long-term, uncertain payoffs. This paper uses a comprehensive sample of diversified and nondiversified firms from 1980 to 1999 to study the relationship between diversification and innovation. I find a robust negative correlation between diversification and R&D intensity, even when controlling for firm scale, cash flow, and investment opportunities. Industry-adjusted R&D—the difference between the R&D intensity of a diversified firm and the R&D intensity it would most likely have if its divisions were standalone firms—is negative, consistent with the hypothesis that diversification reduces innovation by discouraging R&D investment. However, other evidence suggests that internal-capital-market inefficiencies, rather than managerial myopia, are driving the negative relationship between diversification and innovation. en_US
dc.language.iso en_US en_US
dc.relation.ispartof Contracting and Organizations Research Institute publications (MU) en_US
dc.subject.lcsh Diversification in industry -- United States en_US
dc.subject.lcsh Research and development projects en_US
dc.subject.lcsh Organizational change en_US
dc.title Are Internal Capital Markets Good for Innovation? en_US
dc.type Working Paper en_US
dc.source.harvested Peter G. Klein's web page en_US
dc.relation.ispartofcommunity University of Missouri-Columbia. Contracting and Organizations Research Institute


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