Working Paper: NBER ID: w27931
Authors: Min Dai; Xavier Giroud; Wei Jiang; Neng Wang
Abstract: We propose a tractable model of dynamic investment, spinoffs, financing, and risk management for a multi-division firm facing costly external finance. Our main results are: (1) within-firm resource allocation is based not only on the divisions’ productivity—as in “winner picking” models—but also their risk; (2) firms may voluntarily spin off productive divisions to increase liquidity; (3) diversification can reduce firm value in low-liquidity states; (4) corporate socialism makes liquidity less valuable; (5) division investment is determined by the ratio between marginal q and marginal value of cash. We further generalize our model to account for capital redeployability, M&As, and managerial entrenchment.
Keywords: Internal Capital Markets; Multidivision Firms; Corporate Finance
JEL Codes: D92; G3; L25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher productivity (O49) | more resource allocation (D29) |
| low liquidity states (H74) | prioritize lower-risk divisions (G11) |
| spinning off a division (L23) | enhance liquidity (G19) |
| diversification (G11) | reduce firm value in low-liquidity states (G33) |
| corporate socialism (P16) | diminishes liquidity's value (E41) |
| ratio of marginal q to marginal value of cash (E41) | division investment decisions (G11) |