Mis-Allocation within Firms: Internal Finance and International Trade

61 Pages Posted: 25 Mar 2020

See all articles by Sebastian Doerr

Sebastian Doerr

Bank for International Settlements

Dalia Marin

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Davide Suverato

Ludwig Maximilian University of Munich (LMU)

Thierry Verdier

Paris School of Economics (PSE); Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2020

Abstract

We develop a novel theory of mis-allocation within firms (rather than between firms) due to managers' empire building. We introduce an internal 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: China shock, Conglomerate discount, Internal Capital Markets, multi-product firms, trade and organization

JEL Classification: D23, F12, G30, L22

Suggested Citation

Doerr, Sebastian and Marin, Dalia and Suverato, Davide and Verdier, Thierry, Mis-Allocation within Firms: Internal Finance and International Trade (March 2020). CEPR Discussion Paper No. DP14478, Available at SSRN: https://ssrn.com/abstract=3560285

Sebastian Doerr (Contact Author)

Bank for International Settlements ( email )

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CH-4002 Basel
Switzerland

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Dalia Marin

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

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Munich, D-80539
Germany
+49 89 2180 2446 (Phone)
+49 89 2180 6227 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

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Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Davide Suverato

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

Thierry Verdier

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014
France

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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