Internal Capital Markets and Company Value

Abstract: Ever since the first conglomerates were formed in the 1920ies, researchers have examined advantages and disadvantages of conglomeration, and if it creates or destroys shareholder value. The purpose of this thesis is to examine how variables that are descriptive for internal capital markets, one of the main features of conglomerates, affect the market value of Swedish company groups. Our findings suggest that internal capital markets destroy value in company groups with operations in capital intense industries, while there is no evidence that this is true for company groups with operations in less capital intense industries. In capital intense industries, the strongest negative influence on company value is the dispersion of the internal capital market, which decreases the market value of the average company group by 5.1 percent. This is followed by the complexity, which decreases the market value by 4.9 percent. Finally, the volume of transfers in the internal capital markets decreases the market value by 0.6 percent. In extreme cases however, the value destruction is substantially more severe.