Sebastian Doerr, Dalia Marin, Davide Suverato, Thierry Verdier, 19 August 2020

A well-established observation in the trade literature is that conglomerate firms are more productive than single-product firms, but this appears to be at odds with findings in the finance literature that multi-segment firms trade at a discount and have lower Tobin’s Q than single-product firms, because internal capital markets misallocate funds across divisions within firms. This column develops a novel theory of misallocation within firms (rather than between firms) due to managers' empire building. Introducing an internal capital market into a two-factor model of multi-segment firms, it shows that more open markets impose discipline on competition for capital within firms, which explains why exporters exhibit a lower conglomerate discount than non-exporters. Testing the model with data on US companies, the authors 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%.

Olivier Accominotti, Delio Lucena-Piquero, Stefano Ugolini, 23 April 2020

Informational problems on the money market can lead to credit booms and financial panics. This column shows that, during the first globalisation of 1880-1914, uncollateralised international corporate debts were transformed into highly liquid and safe money market instruments through a refined process of information production involving various intermediaries. This suggests that the design of money market instruments is an essential determinant of the liquidity and resilience of money markets.

Claudia Steinwender, 11 April 2018

Flows of information, though critical for the efficient functioning of markets, are often limited in reality, potentially distorting trade flows and price patterns. This column uses the transatlantic telegraph connection of 1866 to explore how changes in information frictions affected cotton markets in the US and UK. The results show that information frictions decrease average trade flows and the volatility of trade, leading to substantial welfare losses.

Philippe Andrade, Richard Crump, Stefano Eusepi, Emanuel Moench, 23 December 2014

Expectations are critical for macroeconomics and financial markets. But the expectation-formation process is not well understood. This column discusses some empirical characteristics of forecast disagreement from professional forecasters in the US, and discusses the ‘information frictions’ that underlie the heterogeneity of expectations.

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