Citation

Discussion Paper Details

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Title: Mis-allocation Within Firms: Internal Finance and International Trade

Author(s): Sebastian Doerr, Dalia Marin, Davide Suverato and Thierry Verdier

Publication Date: March 2020

Keyword(s): China shock, Conglomerate discount, Internal Capital Markets, multi-product firms and trade and organization

Programme Area(s): Financial Economics and International Trade and Regional Economics

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%.

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Bibliographic Reference

Doerr, S, Marin, D, Suverato, D and Verdier, T. 2020. 'Mis-allocation Within Firms: Internal Finance and International Trade'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14478