Question:
What is the The capital redeployment hypothesis?
Author: Hjalmer PedersenAnswer:
Main idea: incentives of managers to share information with the market distorted difficult to destribute capital efficiently across firms. Mergers can help to overcome distorted icentives and managers of merged firms can redeploy capital more efficiently within firm than the external capital markets How? Through internal system of rewards and penalties Example: a owner that gives funds to a (merged) firm can incentivize the management of the merged firm the reallocation of capital from a non- performing plant of the firm to a more profitable one. Without the merger and the incentive structure capital would not be reallocated. Important here is also the conflict of interest between managers and owners.
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