International trade and the allocation of capital within firms

Sebastian Doerr, Dalia Marin, Davide Suverato and Thierry Verdier
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Davide Suverato: ETH Zurich
Thierry Verdier: PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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Abstract: This paper introduces an internal capital market into a two-factor model of multi-segment firms. It features empire building by managers and informational frictions within the organization. The headquarters knows less about a segment's true cost than its divisional managers do, so managers can over-report their costs and receive more capital than optimal. Our novel theory, which enables us to endogenize the cost structure of multi-segment firms, shows that international trade imposes discipline on divisional managers and improves the capital allocation between divisions, thereby lowering the conglomerate discount. The theory can explain why exporters exhibit a lower conglomerate discount than non-exporters. We exploit the China shock as an exogenous change to competition to confirm the model's predictions with data on US companies.

Keywords: Multi-product firms; Trade and organization; Internal capital markets; Conglomerate discount; China shock (search for similar items in EconPapers)
Date: 2025-01
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Published in Journal of International Economics, 2025, 153, pp.104023. ⟨10.1016/j.jinteco.2024.104023⟩

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Journal Article: International trade and the allocation of capital within firms (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:pseptp:halshs-05033171

DOI: 10.1016/j.jinteco.2024.104023

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