Mis-Allocation within Firms: Internal Finance and International Trade

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 9426

Classification and Topics

• Classification: Wirtschaft ; Models of Trade with Imperfect Competition and Scale Economies; Fragmentation ; Corporate Finance and Governance: General ; Firm Organization and Market Structure ; Organizational Behavior; Transaction Costs; Property Rights
• Subject: multi-product firms ; trade and organization ; internal capital markets ; conglomerate discount ; China shock

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Doerr, Sebastian ; Marin, Dalia ; Suverato, Davide ; Verdier, Thierry ; Verdier, Thierry
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2021

Further information

• Handle: http://hdl.handle.net/10419/248971
• Last update: 08.09.2025, 11:43 AM CEST