The Research On The Internal Capital Market Allocative Efficiency From The Perspective Of Multi-Layered Principal-Agent

Over the recent thirty years, the development of China’s economy has maintained a comparatively fast speed in the world. Thus, the enterprise, as the fundamental element of the national economy, has achieved increasingly rapid development. There emerged the enterprise groups characterized by large-scale, diversification and internationalization. However, problems within the enterprise groups has become gradually obvious, such as the low internal capital market efficiency, the out-of-control enterprise management, the imperfect governance structure, the single management incentives and the incomplete theoretical system of internal capital market operation. The issue of capital allocation within diversified enterprises is becoming more and more significant, the essence of which lies in the issue of allocative efficiency within the internal capital market. Therefore, the research on ICM allocative efficiency mechanisms in our country is a practical problem urgently to be solved. The ICM allocative efficiency issue is the core of ICM theory. Over the recent years, it aroused wide attention from scholars at home and abroad who studied this issue from different perspectives. This paper selects the perspective of multi-layered principal-agent in order to better reveal the ICM allocative efficiency mechanisms and provide a theoretical basis and practical guidance to the improvement of capital allocation efficiency within the diversified enterprises in our country.This paper adopts the methods of theoretical analysis, simulation and empirical research, from the perspective of theory and practice, and focuses on the view of multi-layered principal-agent to study the ICM allocative efficiency mechanisms. The agency relationships in the ICM allocative efficiency mechanisms can be divided into two kinds:the first is the relationship of shareholders and headquarters; the second is the relationship of headquarters and branches. The research shows that the first kind of agency relationship exerts a decisive effect on the ICM allocative efficiency, determining the overall direction of ICM allocation; the second kind of agency relationship plays an important role in ICM allocation. The multi-level structure within diversified enterprise requires that capital should be allocated between several headquarters and branches and a separate allocation will influence the overall allocative efficiency. What’s more, the investment decisions from headquarters, the efforts of branches and their mutual effects are also vital factors impacting the allocative efficiency. This paper proposes that within the diversified enterprise groups, in order to improve the ICM allocative efficiency, shareholders should encourage and supervise the behavior of headquarters and headquarters should inspire and make asset allocation for branches.The main innovation of this paper focuses on the following three points:(1) Study the internal capital market allocative efficiency from the perspective of agency. While there are tremendous documents at home and abroad researching the internal capital market efficiency from multiple perspectives, the perspective of agency is rare. This paper, based on the capital allocation process from externality to headquarters and finally to branches, selects the perspective of multi-layered principal-agent to illustrate and study the mechanism of capital allocation. Furthermore, it is combined with the actual situation of Chinese enterprises groups to conduct a thorough analysis of the internal capital market efficiency and make a conclusion. This paper is also intended to construct the logical framework of ICM allocative efficiency theory based on the multi-layered entrust-agent.(2) Apply economic and mathematical approaches like game theory and information economy to the normative study. Since the relationship between shareholders and enterprise groups is the first kind of agency relationships, we are based on the idea of dynamic programming to explore the issue of shareholders’incentives and supervision to headquarters. Similarly, as for the second kind of agency relationships:headquarters and branches, the signal game theory and linear programming method are applied to the research on optimal capital allocative efficiency in diversified enterprises.(3) Use empirical research methods to provide evidence for the internal capital market allocation from the perspective of multi-layered principal-agent. In our country, the majority of researches on internal capital market are normative and case study, the quantitative study is rare. This paper picks out state-owned enterprises in our country as the sample and makes an empirical test about the incentive effects and internal capital market efficiency within the enterprises.