Dissecting Conglomerates

Abstract

We develop a new method to estimate Tobin’s qs of conglomerate divisions without relying on standalone firms. Divisional qs differ considerably from qs of standalone firms and, consistent with theories of corporate diversification, are less volatile and less sensitive to macroeconomic shocks. In contrast to prior evidence based on standalone qs, divisional investment is highly sensitive to divisional qs. This sensitivity disappears after a division is spun-off into a standalone firm. Moreover, divisional qs predict both the volume and announcement returns of diversifying acquisitions. Overall, our estimates provide new opportunities to study conglomeration and internal capital allocation.

Keywords: boundaries of the firm, segment valuation, conglomerate investment, internal capital markets, quantile regressions

JEL Classification: G32, G34