Template-Type: ReDIF-Paper 1.0
Author-Name: Sebastian Doerr
Author-X-Name-First: Sebastian
Author-X-Name-Last: Doerr
Author-Name: Dalia Marin
Author-X-Name-First: Dalia
Author-X-Name-Last: Marin
Author-Name: Davide Suverato
Author-X-Name-First: Davide
Author-X-Name-Last: Suverato
Author-Name: Thierry Verdier
Author-X-Name-First: Thierry
Author-X-Name-Last: Verdier
Title: Mis-allocation within firms: internal finance and international trade
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 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). We then exploit the China shock as an exogenous shock to competition to test the model's predictions with data on US companies. Results show that tougher competition significantly reduces managers' over-reporting of costs and improves the allocation of capital within firms.
Length: 72 pages
Creation-Date: 2022-07
File-URL: https://www.bis.org/publ/work1030.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1030.htm
File-Format: text/html
Number: 1030
Keywords: multi-product firms, trade and organisation, internal capital markets, conglomerate discount, China shock
Classification-JEL: F12, G30, L22, D23
Handle: RePEc:bis:biswps:1030