Working Paper: NBER ID: w18592
Authors: Xavier Giroud; Holger M. Mueller
Abstract: We document how a plant-specific shock to investment opportunities at one plant of a firm ("treated plant") spills over to other plants of the same firm--but only if the firm is financially constrained. While the shock triggers an increase in investment and employment at the treated plant, this increase is offset by a decrease at other plants of the same magnitude, consistent with headquarters channeling scarce resources away from other plants and toward the treated plant. As a result of the resource reallocation, aggregate firm-wide productivity increases, suggesting that the reallocation is beneficial for the firm as a whole. We also show that--in order to provide the treated plant with scarce resources--headquarters does not uniformly "tax" all of the firm's other plants in the same way: It is more likely to take away resources from plants that are less productive, are not part of the firm's core industries, and are located far away from headquarters. We do not find any evidence of investment or employment spillovers at financially unconstrained firms.
Keywords: capital allocation; labor reallocation; internal capital markets; financial constraints
JEL Codes: D24; G3; J63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investment opportunities at treated plant (G31) | Reallocation of resources from other plants (L99) |
| Reallocation of resources from other plants (L99) | Aggregate firm-wide productivity (O49) |
| New airline route reduces travel time to treated plant (L93) | Increase in investment at treated plant (E22) |
| New airline route reduces travel time to treated plant (L93) | Decrease in investment at other plants (E22) |
| Financially constrained firms (G32) | Reallocation of resources toward treated plant (Q16) |
| Reallocation of resources toward treated plant (Q16) | Increase in employment at treated plant (J65) |
| Reallocation of resources toward treated plant (Q16) | Decrease in employment at other plants (J63) |