Research on the efficiency of internal capital market of military groups

Cross subsidization exists in internal capital market due to the specific features of Chinese military groups, which results in deteriorating efficiency of the market. A model was established to evaluate sensitivity between return on equity (ROE) and capital investment of subsidiaries of military groups. Sum of the sensitivity scores indicates the internal capital market efficiency. The efficiency was tested based on public financial data of listed companies owned by military groups from 2007 to 2008. Almost all the groups got negative total scores, which gave evidence of inefficient internal capital market of Chinese military groups. The results are consistent with the theoretic analysis.