Are Internal Capital Markets Ex Post Efficient?

Internal capital markets enable conglomerates to allocate capital to segments throughout the enterprise. Prior literature provides evidence that internal capital markets efficiently allocate capital based predominantly on group member prior performance, consistent with the “winner picking” hypothesis. However, existing research has not examined the critical question of how these “winners” perform subsequent to receiving internal capital—that is, do winners keep winning? We extend the literature by providing empirical evidence on whether or not internal capital markets are ex post efficient. We find, in contrast to mean reversion, that winners continue their relatively high performance. Our study contributes to the literature examining the efficiency of internal capital markets and the conglomerate discount, as well as the literature specifically examining capital allocation in financial firms.