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Mis-Allocation within Firms: Internal Finance and International Trade

Sebastian Doerr, Dalia Marin (), Davide Suverato, Thierry Verdier and Thierry Verdier

No 9426, CESifo Working Paper Series from CESifo

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.

Keywords: multi-product firms; trade and organization; internal capital markets; conglomerate discount; China shock (search for similar items in EconPapers)
JEL-codes: D23 F12 G30 L22 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-fdg and nep-int
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