Dissecting Conglomerate Valuations

Abstract

We develop a new method to estimate Tobin's qs of conglomerate divisions without relying on standalone firms. Divisional qs differ considerably from those of standalone firms across industries, over time, and in their sensitivity to economic shocks. The differences are explained by intra-conglomerate covariance structures and access to internal capital markets that mitigate external financing frictions. Consequently, the qs capture variation in the allocation of assets in the economy: within firms through internal capital markets, and across focused and diversified firms through diversifying acquisitions. Overall, our method provides opportunities to study the economic mechanisms that explain corporate diversification.

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

JEL Classification: G32, G34