Mis-Allocation within Firms: Internal Finance and International Trade

71 Pages Posted: 30 Nov 2021

See all articles by Sebastian Doerr

Sebastian Doerr

Bank for International Settlements (BIS) - Monetary and Economic Department

Dalia Marin

Technical University of Munich

Davide Suverato

ETH Zurich

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 3 versions of this paper

Date Written: 2021

Abstract

This paper develops a novel theory of capital mis-allocation within firms that stems from managers’ empire building and informational frictions within the organization. Introducing an internal capital market into a two-factor model of multi-segment firms, we show that international competition imposes discipline on managers and reduces capital mis-allocation across divisions, thereby lowering the conglomerate discount. The theory can explain why exporters exhibit a lower conglomerate discount than non-exporters (a new fact we establish). Testing the model’s predictions with data on US companies, results suggest that Chinese import competition significantly reduces managers' over-reporting of costs and improves the allocation of capital within firms.

Keywords: multi-product firms, trade and organization, internal capital markets, conglomerate discount, China shock

JEL Classification: F120, G300, L220, D230

Suggested Citation

Doerr, Sebastian and Marin, Dalia and Suverato, Davide and Verdier, Thierry, Mis-Allocation within Firms: Internal Finance and International Trade (2021). CESifo Working Paper No. 9426, Available at SSRN: https://ssrn.com/abstract=3971301 or http://dx.doi.org/10.2139/ssrn.3971301

Sebastian Doerr

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

HOME PAGE: http://www.sdoerr.com

Dalia Marin (Contact Author)

Technical University of Munich ( email )

Davide Suverato

ETH Zurich ( email )

LEE G104
Leonhardstrasse 21
Zurich
Switzerland

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
22
Abstract Views
169
PlumX Metrics