Misallocation of Internal Funds to Loss-Making Zombie Businesses in the Electronics Industry

Sumio Saruyama () and Peng Xu ()
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Sumio Saruyama: Japan Center for Economic Research
Peng Xu: Hosei University

Chapter Chapter 3 in Excess Capacity and Difficulty of Exit, 2021, pp 39-69 from Springer

Abstract: Abstract Linking segment employment to segment investment in Japanese electronics firms, we find that segment investment increases with segment employment irrespective of segment operating profitability. We show that the internal capital market equalizes the impacts of cash flow across segments. However, the internal capital market does not cut back on investments in loss-making segments. Moreover, investments in all segments increase even when the whole firm is in deficit. Nevertheless, segments with better investment opportunities do not invest more. Not surprisingly, investment in a deficit segment exacerbates subsequent segment profitability and segment asset turnover. Likewise, single-segment firms also have excess capacity, whereas they prolong unnatural investment.

Keywords: Segment profitability; Segment investment; Segment employment; Cash flow; Employment consideration (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:spr:spbchp:978-981-16-4900-4_3

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DOI: 10.1007/978-981-16-4900-4_3

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