Conglomerate Firms and Internal Capital Markets

96 Pages Posted: 21 Nov 2006  

Vojislav Maksimovic

University of Maryland - Robert H. Smith School of Business

Gordon M. Phillips

Tuck School of Business at Dartmouth; National Bureau of Economic Research (NBER)

Date Written: May 17, 2006

Abstract

The large literature on conglomerate firms began with the documentation of the conglomerate discount. Given conglomerate firm production represents more than 50 percent of production in the United States, this discount has represented a large economically important puzzle for the U.S. economy. For corporate finance, the primary question about diversification is "When does corporate diversification affect firm value?" And, "When it does, how does it do so?" Early literature came to the conclusion that the conglomerate discount was the result of problems with resource allocation and internal capital markets. Recent empirical literature has found that self-selection by firms with different investment opportunities can explain the conglomerate discount. Additional theoretical and empirical research has shown how a model of profit-maximizing firms with different abilities and investment opportunities can explain resource allocation by conglomerate firms.

Keywords: Conglomerate firms, multidivisional firms, firm organization, investment, internal capital markets, conglomerates

JEL Classification: G31, G34

Suggested Citation

Maksimovic, Vojislav and Phillips, Gordon M., Conglomerate Firms and Internal Capital Markets (May 17, 2006). Available at SSRN: https://ssrn.com/abstract=946421 or http://dx.doi.org/10.2139/ssrn.946421

Vojislav Maksimovic

University of Maryland - Robert H. Smith School of Business ( email )

Van Munching Hall
College Park, MD 20742-1815
United States
301-405-2125 (Phone)
301-314-9157 (Fax)

HOME PAGE: http://www.rhsmith.umd.edu/finance/vmax/

Gordon M. Phillips (Contact Author)

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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