Mis-allocation Within Firms: Internal Finance and International Trade
58 Pages Posted: 9 Mar 2020
Date Written: February 14, 2020
We develop a novel theory of mis-allocation within firms (rather than between firms) due to managers’ empire building. We introduce an in- ternal capital market into a two-factor model of multi-segment firms. We show that more open markets impose discipline on competition for capital within firms, which explains why exporters exhibit a lower conglomerate discount than non-exporters (a fact that we establish). Testing our model with data on US companies, we establish that import competition reduces mis-allocation within firms. A one standard deviation increase in Chinese imports lowers the conglomerate discount by 32% and over-reporting of costs by up to 15%.
Keywords: Multi-Product Firms, Trade and Organization, Internal Capital Markets, Conglomerate Discount, China Shock
JEL Classification: F12, G30, L22, D23
Suggested Citation: Suggested Citation