The Effect of External Finance and Internal Capital Markets on the Equilibrium Allocation of Capital ∗

@inproceedings{Almeida2002TheEO,
  title={The Effect of External Finance and Internal Capital Markets on the Equilibrium Allocation of Capital ∗},
  author={Heitor Almeida and Daniel Wolfenzon},
  year={2002}
}
We develop an equilibrium model to understand how the efficiency of capital allocation depends on outside investor protection, Þrms’ external Þnancing needs and conglomeration. We show that when capital allocation is constrained by poor investor protection, an increase in Þrms’ external Þnancing needs and a decrease in conglomeration may improve allocative efficiency by fostering the reallocation of capital from low productivity projects to high productivity ones. Our prediction about… CONTINUE READING
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