Do Conglomerate Firms Allocate Resources Inefficiently Across Industries? Theory and Evidence
University of Maryland - Robert H. Smith School of Business
Gordon M. Phillips
University of Southern California; National Bureau of Economic Research (NBER)
The Journal of Finance, Vol. 57, pp. 721-767, 2002
We develop a profit-maximizing neoclassical model of optimal firm size and growth across different industries based on differences in industry fundamentals and firm productivity. In the model, a conglomerate discount is consistent with profit maximization. The model predicts how conglomerate firms will allocate resources across divisions over the business cycle and how their responses to industry shocks will differ from those of single-segment firms. Using plant level data, we find that growth and investment of conglomerate and single-segment firms is related to fundamental industry factors and individual segment level productivity. The majority of conglomerate firms exhibit growth across industry segments that is consistent with optimal behavior.
Accepted Paper Series
Date posted: April 25, 2002
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