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digit analysis can be used to detect allocations affected by managerial interventions. We are unaware of any study applying the Benford test to internal capital markets, while this approach appears very useful in this context. It is commonly used in the auditing, financial accounting, and fraud detection literature. JEL classification: C16, G21, G31. Keywords: Internal capital allocation; the Benford law; managerial engagement. 1. INTRODUCTION The allocation of scarce resources to the subunits and divisions represents a cru- cial process in conglomerate firms. The

Abstract

Allocating risk properly to subunits is crucial for performance evaluation and internal capital allocation of portfolios held by banks, insurance companies, investment funds and other entities subject to financial risk. We show that by using coherent measures of risk it is impossible to allocate risk satisfying simultaneously the natural game theoretical requirements of Core Compatibility and Strong Monotonicity. To obtain the result we characterize the Shapley value on the class of totally balanced games and also on the class of exact games as being the only risk allocation method satisfying Strong Monotonicity, Equal Treatment Property and Efficiency. Moreover, we clarify and interpret the related game theoretical requirements that have appeared in the literature so far and have been applied to risk allocation.

, charitable foundations and trusts or private sector entities. Recipients are often non-profit entities and educational institutions, but can also be individuals and businesses. Today, grants remain the most widely practiced model of financing social entrepreneurs. In spite of the advantage of providing capital at zero cost, there are important limitations to grant funding. First, grants are typically project specific. They exclude overhead and business development costs, and do not provide full internal capital allocation flexibility. Second, grants typically face a

by financial economists. These studies largely focus on the differences between internal and external capital allocation. Indeed, the insight that the key feature of conglomerates is the replacement of external capital markets with internal capital allocation has led to a large literature, including theoretical work that predicts differences in investment behavior between conglomerate and single-business firms and empirical work that tests these theories. The empirical work on internal capital markets is arguably the most fully developed body of empirical work in

,\tilde{A}_{d})} , that were created using some capital allocation methodology, We refer to such methodology as to an Internal Capital Allocation Model (ICAM). uses as its input the observations of past P&Ls. The key ingredient to both backtesting methods is the estimation of (5.1) ∑ i = 1 d 𝔼 θ 0 ⁢ [ Z S , A ^ θ 0 ⁢ ( X i + A ~ i ) ] \sum_{i=1}^{d}\mathbb{E}^{\theta_{0}}[Z_{S,\hat{A}}^{\theta_{0}}(X_{i}+\tilde{% A}_{i})] and the estimation of (5.2) 𝔼 θ 0 ⁢ [ Z S , A ^ θ 0 ⁢ ( X i + A ~ i ) ] , i = 1 , 2 , … , d . \mathbb{E}^{\theta_{0}}[Z_{S,\hat{A}}^{\theta_{0}}(X

Salesman Problem: A Survey. In: O. R. Jg. 1968. May-June, S. 538 ff. Methods of internal Capital Allocation. In: HBR. Jg. 1956. November-December, S. 115 ff. The Bond Refunding Decision as a Markov Process. In: Man. Sc. Jg. 1966. August, S. 545 ff. Réflexions sur la concurrence du Rail et de la Route, le déclassement des lignes non rentables et le deficit du chemin de fer. In: L'Economie Electrique. No. 2. Jg. 1955. Die optimale Dividendenpolitik der Unternehmen. In: Unternehmensforschung. Jg. 1967. Hef t 3, S. 131 ff. Reciprocal reinsurance treaties seen as a

–88, 580 by leaders, 81, 352 of managers, 706, 708 obedience, 87–88 organizational architecture and, 56–57, 82–83 in organizations, 56–58 peer effects, 91–92, 200 of risk taking, 85–86 strategy and, 807–9 See also incentives multidivisional firms Chandler on, 169, 180n33, 415–16, 658, 813, 831 decision rights allocation, 415–16, 424 information flows, 408 internal capital allocation, 398, 659, 663 productivity studies, 685 spin-offs compared to, 1079n24 See also M-form organizations multinational firms, 830–31, 837, 843 multiproduct firms challenges, 829

undertake production. Business groups step in where the market does not work or is not allowed to work by “information problems,” “misguided regulations,” or “inefficient judicial systems” (Caves 1989; Khanna and Palepu 1997, 1999). For example, if the capital market is narrow and does not work efficiently, economists predict that the firm will tend to withhold earnings and develop internal capital allocation mechanisms to guide funds to their best economic use within the firm itself, either in an existing business or in a new one. Business groups appear and grow in an

Park M.S. Agricultural Economics, May 2001 People’s (Renmin) University, China B.S. Economics, July 1996 WORK EXPERIENCE Sanford Bernstein, NY Research Associate, Quantitative Asset Management Strategy, 02/2003-08/2003 Deutsche Bank Asset Management, NY Summer Intern, Global Research Center, 06/2002-09/2002 WORKING PAPERS “Financial Constraints, R&D Investment, and Stock Returns: Theory and Evidence” (Job Market Paper) Committee: Name, Name, Name, Name, Name “Distinguishing Rational and Behavioral Models of Momentum” Ongoing Research Internal Capital

that internal capital allocation may be better than what the market can achieve, because the managers may have deeper knowledge and may have better incentives than do bankers (see Gertner and Scharfstein, this volume). In any case, multiproduct firms may be efficient. We might note that industrial organization economics provides some other potential advan- tages to a multiproduct firm, but again Teece’s arguments about the role of contracting apply. For example, static Nash behavior between providers of substitutes (or complements) will lead to prices that do not