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Internal Capital Markets, Cross-Subsidization and Product Market Competition

Giacinta Cestone () and Chiara Fumagalli

No 2935, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper analyses the interaction between internal capital market allocations and product market competition. It is argued that diversification and divestiture are both rational responses to anticipated changes in the competitive environment. Diversification is the optimal response to an anticipated toughening of competition, whereas divestiture may encourage competitors to adopt collusive pre-commitments. Moreover, thanks to the ability to shift resources across units, a diversified business group can consolidate its market power across industries. Our results yield empirically testable predictions relating the stock-market reaction to diversification announcements and the diversification premium to product market factors.

Keywords: Internal capital markets; Cross-subsidization; Product market competition; Business groups; Conglomerate discount (search for similar items in EconPapers)
JEL-codes: G30 L13 L20 (search for similar items in EconPapers)
Date: 2001-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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