Conglomerate entrenchment under optimal financial contracting

Antoine Faure-Grimaud and Roman Inderst

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We provide a formal analysis of the notion that conglomerates are more ‘entrenched’ as they have ‘deeper pockets’. Using the financial contracting model of Bolton and Scharfstein (1990), we can isolate two effects that confirm this conjecture: the pooling of cash flows, which allows to smooth out repayments, and the ability to obtain better credit terms. For less profitable business segments, the internal capital market operated in a conglomerate may, however, work in the opposite direction, increasing the sensitivity of operations to own cash flows and increasing the likelihood of exit.

Keywords: conglomerate entrenchment; financial constraints; predation (search for similar items in EconPapers)
JEL-codes: G32 G34 L22 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2004-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://eprints.lse.ac.uk/24788/ Open access version. (application/pdf)

Related works:
Journal Article: Conglomerate Entrenchment under Optimal Financial Contracting (2005)
Working Paper: Conglomerate Entrenchment under Optimal Financial Contracting (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:24788

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().