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%.

Giacinta Cestone, Chiara Fumagalli, Francis Kramarz, Giovanni Pica, 05 November 2016

Diversified business groups and conglomerates have been shown to withstand economic shocks better than equivalent standalone companies. This column uses employment data from France to argue that business groups use internal labour markets to save on termination, search, and training costs, which helps them cope with unexpected changes. These internal markets also provide implicit employment insurance to employees.


CEPR Policy Research