Conglomerate Firms and Internal Capital Markets
University of Maryland - Robert H. Smith School of Business
Gordon M. Phillips
Tuck School of Business at Dartmouth; 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
Date posted: November 21, 2006
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