Working Paper: CEPR ID: DP2935
Authors: Giacinta Cestone; Chiara Fumagalli
Abstract: This Paper analyses the interaction between internal capital market allocations and product market competition. It is argued that diversification and divestiture are both rational responses to anticipated changes in the competitive environment. Diversification is the optimal response to an anticipated toughening of competition, whereas divestiture may encourage competitors to adopt collusive pre-commitments. Moreover, thanks to the ability to shift resources across units, a diversified business group can consolidate its market power across industries. Our results yield empirically testable predictions relating the stock-market reaction to diversification announcements and the diversification premium to product market factors.
Keywords: business groups; conglomerate discount; cross-subsidization; internal capital markets; product market competition
JEL Codes: G30; L13; L20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| diversification (G11) | competitive pressures (L11) |
| internal capital allocation decisions (G31) | competitive behavior (L13) |
| resource reallocations (Q20) | competitive strategies (L21) |
| divestiture (G34) | collusive precommitments (D70) |
| internal resource reallocations (D25) | product market considerations (L17) |