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Advantages and Disadvantages of internal capital market under Corporate Governance

Author: JinYongLi¡¡LiBin From: www.yourpaper.net Posted: 2009-04-26 18:34:01 Read:
[Abstract] In recent years, the internal capital market theory and the theory of corporate governance continuous development and improvement, has played an increasingly important role in guiding the national macro-control and micro economic decision-making process. For the interaction between the two theories, the interaction research also increasing attention has been paid. Analysis of the advantages and disadvantages of internal capital markets in the resource allocation process from the point of view of corporate governance, to provide a new perspective for the study of the internal capital market.

Introduction

Corporate governance is to affect the internal capital market (internal capital market, ICM) allocative efficiency is extremely important factors. It is rooted in the separation of the modern corporate ownership and management rights and the resulting principal - agent problem, its essence is the control of the Company and residual claims assigned a set of legal, cultural and institutional arrangements to ensure that the value of the company creation and distribution to meet the requirements of different stakeholders.
ICM improve and raise the level of corporate governance are closely related. The one hand, the various advantages of ICM in the resource allocation process will help the enterprises to improve their internal governance structure, improve the management level; On the other hand, the principal-agent problem is the important reason leading to the ICM inefficient. The root causes of speaking, which is caused by corporate governance: corporate equity highly decentralized decision conflicts of interest between investors and managers. The manager of the company and will not do their utmost to maximize the interests of investors. ICM double-agent model for managers to provide more space for personal gain, and then makes this more complex and serious conflict. In addition, the holding company organizational structure, the ICM presence of more controlling shareholder of the occupation of the interests of small shareholders to provide a convenient place.

Under Corporate Governance ICM Advantages and Disadvantages of

(A) traditional external capital markets (externalcapital market, ECM), the fundamental limitations in that it is an external control tool by the regulations and restrictions, and, in the audit of internal incentives and resource allocation mechanism for the lack of participation, ICM mitigate asymmetric information, strengthen supervision and encouragement and relax financing constraints has the incomparable advantage of the ECM.
Mitigate asymmetric information. Information asymmetry is one of the root causes of problems of corporate governance, which enable enterprises to bear the higher transaction costs and monitoring costs, leading to the market price mechanism in the allocation of resources function failure. ECM breadth of information processing dominant, but it is difficult to have timely access to information within the enterprise, it is not possible to respond quickly to changes in the market. A single enterprise in the depth of information processing advantage, but fewer sources of information, and facing the risk of external information distortion. ICM is the position of the middle of the two, the breadth and depth of its information processing is optimized balance, can effectively solve the problem of asymmetric information, to ensure that the the internal information disclosed authenticity, integrity and timeliness and reduce the company occurrence of the process of governance "moral hazard" and "adverse selection" problem, which is also conducive to the the Enterprise Group risk early warning and assessment of the development and strengthening of the internal control system, solve the problems of corporate governance in the market short-sighted.
Effective supervision and encouragement. Funders (corporate headquarters) is the owner of the assets of the use of funds department at ICM, has a residual claim, the funders of the external capital markets is not the owner of the assets of the use of funds sector, does not have a residual claim. It is because of this essential difference, ICM is more effective in terms of supervision and encouragement. Because funders have residual claim under normal circumstances would have paid more supervision efforts to improve project outputs, increasing the final residual income. The governance structure of listed companies in China agent incentive mechanism, constraint mechanism is not perfect even missing, so that the Board is difficult to guarantee the independence of directors and independent directors inadequate responsibility and initiative; senior management incentive and restraint double weakening "internal control" and associated worked a lack of checks and balances, "executives" frequent, highlights the huge governance risks. The presence of ICM can not only improve the incentives of agents, promotion incentives and reputation incentives provide a venue for the flexible use of various payment incentive, more conducive to improve the agent restraint mechanisms, especially the capital market constraints and manager market constraints . In addition, it is also conducive to the Group to create a series of regulatory system of checks and balances. Between Group companies, subsidiaries and affiliates through ICM cross Supervision, attract appropriate and effective participation of various stakeholders in corporate governance and management, and gradually positioning of stakeholders in corporate governance, to play its internal indirectly, to control, internal and external interests coordination and external credit extended role in enhancing governance.
Relax financing constraints. When enterprises are facing financial constraints, you can ICM to expand the scale of financing: First play much money effect ", that is, multiple business units under the control of the same parent company than to run them as a single segment enterprise financial more external capital; play "live money effect", that is, through the ICM configuration flexibility between different projects both quantitative capital. Its specific role in the following three aspects: First, the Group can not entirely related to cash flow in the ICM integration, thereby enhancing the company's overall financial synergies and debt financing capacity, and reduce the possibility of the company is in financial crisis; followed by in the ICM project financing at a lower cost, financing transaction costs and potential risks can be avoided in the ECM, also avoid too many shareholders and creditors involved and lead to the increase in agency costs; Finally, ICM for enterprises Group offers a variety of channels of external capital, enterprise groups under the guidance of the long-term strategy, purpose, step-by-step introduction of a variety of financial investors and strategic investors, to optimize the capital structure of the enterprise groups and segments to prevent property rights The structure is too centralized, and even the "dominance" phenomenon. Also can improve the composition of the Board and the Supervisory Board, to increase the proportion of independent directors, greater play to the role of both in corporate governance, is of great significance for improving corporate governance structure. (B) the Group's internal capital market there are a lot of advantages, but the study found, ICM will lead to some new problems in corporate governance, leading to inefficient allocation of resources.
1 agency cost increases and the prevalence of rent-seeking behavior. The ICM will produce the new agency problems: the agency problems between managers and branch manager of the Group, ICM's inefficient often by this layer of agency problems caused. Internal capital markets, while having the advantage of flexible deployment of resources, but this formulation caused a lack of incentive for the department manager, department manager of the power will be weakened, department managers in order to improve their reputation or find themselves "retreat" of its power to find rent behavior will inevitably distort the allocation of resources in the internal capital market can not achieve the optimal allocation of resources. In addition, internal proxy chain extension and the increase in the level will lead to poor transmission of information within the company, information distortion, caused by the "moral hazard" problem; commissioned agents increase in the level of corporate governance structure more complex, the corporate governance body lack of common basis of interest between the interests of all stakeholders are difficult to reconcile, the controlling shareholder of the abuse of related party transactions, against the interests of minority shareholders. ICM is usually attached to the M-type or H-business organization, the common characteristic of these two forms of organization is a multi-level, which leads inevitably to double or even the emergence of multi-layered agency problems from the point of view of the carrier of the ICM organization, H multi-legal characteristics of the type of organizational structure also makes the conflict of interest between the owner on different levels, which have residual rights of control of internal investors can take advantage of the advantages of management decisions to the detriment of other investors. Organizational structure due to corporate governance issues not only affect the efficiency of the allocation of the ICM, will make even the ICM become a conveyance or transfer of the interests among participants place, thereby undermining the the ICM original capital allocation function.
2 cross-subsidization and egalitarianism. Shlarfstein and Stein double agent model analysis within large enterprises there is a "socialist" phenomenon, that is, lack of investment for a relatively good investment projects, poor investment projects investment over and prevalent in the ICM with inter-sectoral cross-subsidization phenomenon. Egalitarian phenomenon is mainly caused by the branch manager of the rent-seeking behavior, that is, the branch manager is no longer the goal to maximize enterprise value, but actively looking for ways to improve their status and power, waste of resources can not increase in social welfare activities. As Mueller said: accept a gift "with a lower cost of bribery to obtain a higher income or excess profits" rent-seeking behavior of these powers will inevitably lead to distortions in resource allocation, but also increased between principal and agent interests divide.
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