Citation

Discussion Paper Details

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Title: Internal Capital Markets, Cross-Subsidization and Product Market Competition

Author(s): Giacinta Cestone and Chiara Fumagalli

Publication Date: September 2001

Keyword(s): business groups, conglomerate discount, cross-subsidization, internal capital markets and product market competition

Programme Area(s): Financial Economics and Industrial Organization

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.

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Bibliographic Reference

Cestone, G and Fumagalli, C. 2001. 'Internal Capital Markets, Cross-Subsidization and Product Market Competition'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2935