Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/248971 
Year of Publication: 
2021
Series/Report no.: 
CESifo Working Paper No. 9426
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
This paper develops a novel theory of capital mis-allocation within firms that stems from managers’ empire building and informational frictions within the organization. Introducing an internal capital market into a two-factor model of multi-segment firms, we show that international competition imposes discipline on managers and reduces capital mis-allocation across divisions, thereby lowering the conglomerate discount. The theory can explain why exporters exhibit a lower conglomerate discount than non-exporters (a new fact we establish). Testing the model’s predictions with data on US companies, results suggest that Chinese import competition significantly reduces managers' over-reporting of costs and improves the allocation of capital within firms.
Subjects: 
multi-product firms
trade and organization
internal capital markets
conglomerate discount
China shock
JEL: 
F12
G30
L22
D23
Document Type: 
Working Paper
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