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Mis-allocation Within Firms: Internal Finance and International Trade

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

No 14478, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We develop a novel theory of mis-allocation within firms (rather than between firms) due to managers' empire building. We introduce an internal capital market into a two-factor model of multi-segment firms. We show that more open markets impose discipline on competition for capital within firms, which explains why exporters exhibit a lower conglomerate discount than non-exporters (a fact that we establish). Testing our model with data on US companies, we establish that import competition reduces mis-allocation within firms. A one standard deviation increase in Chinese imports lowers the conglomerate discount by 32% and over-reporting of costs by up to 15%.

Keywords: China shock; Conglomerate discount; Internal Capital Markets; multi-product firms; trade and organization (search for similar items in EconPapers)
JEL-codes: D23 F12 G30 L22 (search for similar items in EconPapers)
Date: 2020-03
New Economics Papers: this item is included in nep-com and nep-int
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