Looking inside a conglomerate : efficiency of internal capital allocation and managerial power within a firm

Does more bargaining power of managers inside a firm lead to larger allocations of capital? To tackle this question, we use unique and proprietary panel data on planned and realized capital allocations inside a very large conglomerate. The firm operates worldwide, is headquartered in Europe and has 5 divisions and 22 business units. We measure bargaining power by looking at the three complementary measures of power: (i) tenure of the division CEOs, (ii) whether they have the local nationality and (iii) whether they have an engineering degree (the firm has a very strong and very long engineering tradition). We find that (ex ante) planned allocations of capital are not distorted by bargaining power. Then we study how unexpected cash windfalls at the headquarter level are distributed inside the firm. The cash windfalls result from the sale of equity holdings in other firms and are exogenous to the divisions and business units. We find that managers with more bargaining power get a larger part of the cash windfalls for their own business units. Our results suggest that bargaining power does not matter in formalized allocation processes but rather when it comes to the ad hoc distribution of unexpected cash windfalls. We show that our power variables do not proxy for ability