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: Internalcapitalallocation; the Benford law; managerial
The allocation of scarce resources to the subunits and divisions represents a cru-
cial process in conglomerate firms. The
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.
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 internalcapitalallocation 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
Salesman Problem: A Survey. In: O. R.
Jg. 1968. May-June, S. 538 ff.
Methods of internalCapitalAllocation. 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
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 internalcapitalallocation 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
that internalcapitalallocation 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