Abstract: With the integration of financial businesses, this paper focuses on the relationship between organizational complexity and internal capital markets efficiency in financial conglomerates. It is the first application of the theory of organizational complexity into micro financial organizations. Organizational complexity in financial conglomerates is defind, and then linear and non-linear relations between organizational complexity (as a path) and of internal capital markets efficiency (as a result) are explored in a theoretical perspective. In its empirical study, Chinese financial conglomerates and their financial subsidiaries are used as sample firms to estimate their organizational complexity by using the entropy method. Based on a model of investment cash flow sensitivity analysis, the existence and efficiency of internal capital markets, and its relations with organizational complexity are also tested by building up linear and non-linear regression models. The study finds that, Chinese financial conglomerate samples have efficient internal capital markets. And structural complexity and behavior complexity have an inverted u-shaped relation with internal capital markets efficiency, while relations complexity does not. Therefore, it is possible to improve internal capital markets efficiency in financial conglomerates through managerial optimization of organizational complexity. The paper contributes to a further understanding on how organization evolution shapes up internal capital allocation, as well as practical implications for improving capital allocation efficiency.

Key words: financial conglomerate, organizational complexity, internal capital markets, efficiency, the entropy method