Commentary on “The Economics of Capital Allocation in Firms: Evidence from Internal Capital Markets”

Capital allocation has always been at the core of the debate between executives and investors. Does it maximize shareholder value? Does it enable the strategic direction of the company? And can both be compatible, in a world where long-only is often long only by name?

The historical approach to reconciling these points of view has been to put an economic veneer to the allocation mechanism, based on net present values (NPVs), hurdle rates, and an efficient internal capital market, which should deliver optimal outcomes. Hoang et al. (2025), in “The Economics of Capital Allocation in Firms: Evidence from Internal Capital Markets,” analyze an insightful and extensive chief financial officer (CFO) survey to establish that capital allocation in most companies is both bottom-up and top-down and a lot less analytical than previously thought.

My career as a chief executive officer was changed by a stint in private equity. There, I realized that most executives do not understand value, in part because most of us cannot read a balance sheet. And why would we? Corporate careers are built on managing the profit and loss statement (P&L). Sprinkle in working capital, and you have the metrics of many companies. This blind spot is supposed to be filled by robust capital allocation mechanisms, but Hoang et al. (2025) show that these are often manipulated: from the bottom by divisions that use information asymmetry to make their investments look more value creating in a fight for funding. From the top by headquarters, where half the CFOs admit to corporate socialism and to relying on economic metrics materially less as their tenure lengthens.

Although some judgement and intervention are surely beneficial, the authors question how to avoid crossing the line. The CFO survey shows that, as often in companies, this is attempted by layering processes on top of processes: postinvestment audits, a rear-view mirror that offers a partial solution given shorter managerial tenures, and incentives focused on the greater corporate good but at the risk of diluting division accountability. The contradictions are apparent and clearly detailed by the authors.

This insightful analysis shows that many CFOs still value diversification because it enables an internal capital market that “may decrease cost of capital and improve access to external financing.” In an era built on focus, where diversified conglomerates are shunned by investors, this is another reminder of the many fascinating tradeoffs leadership teams need to manage to optimize value.

By analyzing the analytical, organizational, and emotional forces at play in the capital allocation process, Hoang et al. (2025) offer not only insights for executives, but also a way toward a better alignment and more efficient use of capital.