Internal capital markets: The bright side of corporate politics

This study looks inside the internal capital market of a large retail-banking group to study how internal corporate politics affect internal capital allocation. Our data is from the firm's managerial accounting system and covers all cash flows, internal capital transfers, and investments at the local member bank level. We find some evidence that member banks' investment (loan) growth is not fully independent from their own cash flow (deposit) growth. However, such inefficiencies are not apparent at more influential member banks as identified by the divergence of voting rights from ownership rights. The more influential banks are allocated more funds from the headquarters, but also restrain from overinvestment when experiencing large deposit inflows. Influence is more important for banks with more volatile deposit growth, where better information flow between the banks and the headquarters may be more important. Influence is also more important for small business loans, which contain more soft information than, for example, residential mortgage loans. These results suggest that internal politics inside an organization may have a 'bright side' in that influence is not abused but is helpful in overcoming asymmetric information problems between divisions (member banks in our case) and the headquarters.