Working Paper: CEPR ID: DP14478
Authors: Sebastian Doerr; Dalia Marin; Davide Suverato; Thierry Verdier
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: Multiproduct Firms; Trade and Organization; Internal Capital Markets; Conglomerate Discount; China Shock
JEL Codes: F12; G30; L22; D23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased import competition from China (F69) | Reduction in misallocation within firms (D21) |
| Increased import competition from China (F69) | Reduction in conglomerate discount (G34) |
| Increased import competition from China (F69) | Decrease in overreporting of costs (C82) |
| Competition (L13) | Impact on managers' decisions regarding cost reporting and capital allocation (G31) |
| Competition (L13) | Improved capital allocation efficiency within firms (G31) |
| Competition (L13) | Enhancing efficiency of internal capital markets within multisegment firms (L22) |
| Competition (L13) | Reduction in marginal costs (D40) |
| Increased import competition from China (F69) | Increase in allocated capital to better-performing segments (G31) |