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Conglomerate Firms and Internal Capital Markets

Vojislav Maksimovic

University of Maryland - Robert H. Smith School of Business

Gordon M. Phillips

University of Southern California; National Bureau of Economic Research (NBER)

May 17, 2006

The large literature on conglomerate firms began with the documentation of the conglomerate discount. Given conglomerate firm production represents more than 50 percent of production in the United States, this discount has represented a large economically important puzzle for the U.S. economy. For corporate finance, the primary question about diversification is "When does corporate diversification affect firm value?" And, "When it does, how does it do so?" Early literature came to the conclusion that the conglomerate discount was the result of problems with resource allocation and internal capital markets. Recent empirical literature has found that self-selection by firms with different investment opportunities can explain the conglomerate discount. Additional theoretical and empirical research has shown how a model of profit-maximizing firms with different abilities and investment opportunities can explain resource allocation by conglomerate firms.

Number of Pages in PDF File: 96

Keywords: Conglomerate firms, multidivisional firms, firm organization, investment, internal capital markets, conglomerates

JEL Classification: G31, G34

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Date posted: November 21, 2006  

Suggested Citation

Maksimovic, Vojislav and Phillips, Gordon M., Conglomerate Firms and Internal Capital Markets (May 17, 2006). Available at SSRN: http://ssrn.com/abstract=946421 or http://dx.doi.org/10.2139/ssrn.946421

Contact Information

Vojislav Maksimovic
University of Maryland - Robert H. Smith School of Business ( email )
Van Munching Hall
College Park, MD 20742-1815
United States
301-405-2125 (Phone)
301-314-9157 (Fax)
HOME PAGE: http://www.rhsmith.umd.edu/finance/vmax/
Gordon M. Phillips (Contact Author)
University of Southern California ( email )
Marshall School of Business
Los Angeles, CA 90089
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Feedback to SSRN

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References:  79
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