Managerial political power and the reallocation of resources in the internal capital market

Abstract Research Summary We examine how managers' political power reallocates resources in the internal capital market. By shifting the focus from financial to firm‐specific, non‐financial resources that are difficult to evaluate and zero‐sum in nature, we revise the prevailing view that managers' political power plays a significant yet contingent role under financial constraint and weak governance. We instead characterize managerial political power as an intrinsic, inescapable determinant of internal competition and resource allocation. Our research design links sentence‐by‐sentence, qualitative analyses of the legal opinion delivered as breaking news during the corruption trials involving a key executive at Samsung group with minute‐level shifts in share prices. This study presents a politics‐based theory of the internal capital market and highlights the methodological potential of quantitative case studies. Managerial Summary Managerial politics presents a vexing yet persistent reality of organizational life and the inter‐divisional competition for resources. We attribute its pervasiveness to the contest over non‐financial resources with fuzzy ownership and significant yet uncertain value, such as bargaining power over internal transfer pricing, managerial attention, and control over new business opportunities. Because of the zero‐sum dynamics of these non‐financial resources and their constant scarcity, political contests cannot be suppressed through the provision of financial slack or agency controls and even extend to family members. Appointing rival managers along clearly separated lines of businesses may curb, but not eliminate, managerial politics. We show that investors are acutely aware of the value of managers' political power and make investment decisions based on them.