Cross-Subsidization in Conglomerate Firms: Evidence from Government Spending Shocks

Darren J. Kisgen and Lei Kong

Journal of Financial and Quantitative Analysis, 2024, vol. 59, issue 1, 339-368

Abstract: Exploiting demand shocks from changes in federal government spending, we examine how the organizational structure of a firm affects its investment behavior. Government spending shocks affect the investment of government-dependent conglomerate segments less than matched stand-alone firms. Investment also increases in lower government-dependent segments when other segments within the same firm experience positive demand shocks, indicating cross-subsidization between segments. We further show that this cross-subsidization leads to worse operating performance and increases the diversification discount. Our findings are robust after addressing the endogeneity of government spending.

Date: 2024
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