458 V. Maksimovic and G. Phillips
issue equities after a run-up) is measures using theLang and Stulz (1994)andBerger
and Ofek (1995)measures. Firm size is measured using market valuations.
Peyer finds that firms with efficient ICMs and diversified firms use more net external
capital than comparable standalone firms. Measures of information asymmetry are neg-
atively correlated with the use of external capital. The relation is attenuated for firms
with efficient ICMs.
EEC is positively related to excess value, especially for firms that have efficient ICMs
and firms with larger ICMs. Peyer interprets the positive correlation between the use
of external capital and firm value supports the notion that diversified firms are raising
external capital to invest in a firm-value-increasing manner.
For robustness, Peyer examines changes in EEC in response to changes in the ex-
planatory variables. He finds that increases in ICM efficiency and increases in the size
of the ICM are positively related to changes in EEC. Increases in information asymme-
try have a smaller negative effect on EEC if the firm has an efficient ICM. Moreover,
there exists an association between the increased use of external capital and firm valua-
tions, measured as inBerger and Ofek (1995).
In all, thePeyer (2001)findings that more efficient ICM firms and firms with larger
ICMs use more external capital makes and have a higher firm provides empirical support
forStein (1997).
Billet and Mauer (2003)construct an index of the diversified firm’s internal capital
market that includes the amount of subsidies and transfers and the efficiency of these
flows. Subsidies to divisioniof firmjare calculated as:
Subsidyij=Max(Capital expendituresij−After tax cash flowij, 0 ).They calculate the potential transfer from divisionito other divisions as:
Potential transferij
=Max(After tax cash flowij−wij∗dividendsj−CAPXij, 0 ).Dividends are determined at the firm level. The firm-level dividends are weighted by
wij, the share of assets divisionirepresents of the firmj’s assets in the calculation of
potential transfers.
Billet and Mauer demonstrate that funds flow toward financially constrained efficient
divisions of conglomerates and that these types of transfers to constrained segments
with good investment opportunities increase firm value. They show that the higher the
transfers to financially constrained segments with good investment opportunities, the
higher the overall valuation of the conglomerate.
4.4. Bargaining power within the firm and differential investment opportunities
Rajan, Servaes and Zingales (2000)(RSZ) examine how differential investment oppor-
tunities within the firm affect investment efficiency. The empirical tests in RSZ are of
two kinds. First, they test whether conglomerates distort their investment expenditures