A Literature Review of Internal Capital Market Efficiency Mechanisms

Internal capital markets research is characterized by contention. The bright side school argues that internal capital markets provide firms with efficiency advantages via the manager’s use of quality information when making capital allocation decisions. The counter view, the dark side school, argues that the internal capital budget is a tool used by top management to achieve corporate socialism aims, resulting in inefficient cross subsidization of projects or divisions. A review of the literature indicates substantial support for both schools of thought. It is this undercurrent of contention that I seek to understand in this comprehensive examination paper. Accordingly, the purpose of my comprehensive examination paper is to provide a critical review of the current state of the ICM literature, with a specific focus on ICM advantages and disadvantages, which can otherwise be viewed as ICM efficiency literature. I conclude the paper with future research directions are designed to move the internal capital markets research into a more productive space.