Do Conglomerate Firms Allocate Resources Inefficiently?

51 Pages Posted: 18 Aug 1998

See all articles by Vojislav Maksimovic

Vojislav Maksimovic

University of Maryland - Robert H. Smith School of Business

Gordon M. Phillips

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: February 5, 1999

Abstract

We develop a profit-maximizing neoclassical model of optimal firm size and growth across different industries. 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.

We test our model and find that growth of conglomerate and single-segment firms is related to fundamental industry factors and individual firm-segment productivity consistent with our simple neoclassical theory. Conglomerates grow less in a particular segment if their other segments are more productive and if their other segments experience a larger positive demand shock. We find that the growth rates of peripheral segments are very sensitive to relative productivity and that conglomerates sharply cut the growth of unproductive peripheral segments. We do find some evidence consistent with agency problems for conglomerate firms that are broken up. However, the majority of conglomerate firms exhibit growth across business segments that is consistent with optimal behavior.

JEL Classification: G32, G34, L11

Suggested Citation

Maksimovic, Vojislav and Phillips, Gordon M., Do Conglomerate Firms Allocate Resources Inefficiently? (February 5, 1999). Available at SSRN: https://ssrn.com/abstract=108068 or http://dx.doi.org/10.2139/ssrn.108068

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://scholar.rhsmith.umd.edu/vmax/home

Gordon M. Phillips (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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