The Liability of Aging in Internal Capital Markets

Diversified firms differ considerably in the efficiency of their internal capital markets (ICMs), through which scarce capital is allocated across alternative growth opportunities. This study highlights the role of firm age in generating this heterogeneity. Consistent with the hypothesis that organizational aging increases the rigidity of capital allocation, our analysis of Japanese firms identifies a strong inverse association between ICM efficiency and firm age. This correlation is robust to controlling for covariates suggested by alternative explanations such as agency problems and the individual aging of managers. Moreover, the correlation is substantially weakened when a firm is drastically reorganized. These results suggest that the liability of aging (age-based organizational rigidity) significantly affects intrafirm resource mobility, which is crucial for a firm's ability to respond to external changes.