The dark side of internal capital markets II
Subtitle: evidence from diversified conglomerates
By: David S. Scharfstein.
Contributors: National Bureau of Economic Research.
Series: NBER working paper series -- working paper 6352; Working paper series (National Bureau of Economic Research) -- working paper no. 6352.
Publisher: National Bureau of Economic Research
Published: 1998
Place of publication: Cambridge, MA
Language: eng
Number of pages: 35
Subjects: Conglomerate corporations -- United States -- Finance -- Econometric models.; Capital investments -- United States -- Econometric models.; Capital budget -- United States -- Econometric models.; Resource allocation -- Econometric models.
Description: This paper is an empirical examination of capital allocation in a sample of 165 diversified conglomerates in 1979. I find that divisions in high-Q manufacturing industries tend to invest less than their stand-alone industry peers, while divisions in low-Q manufacturing industries tend to invest more than their stand-alone industry peers. This sort of socialism in which investment tends to get equalized across divisions is particularly pronounced in a conglomerate's smaller divisions. It is also more pronounced in firms in which management has small equity stakes suggesting that agency problems between corporate headquarters and investors are at the root of the problem. By 1994, only 53 (32%) of these firms continue to be free-standing diversified conglomerates. Fifty-five (33%) choose to sell off unrelated divisions and focus on one core business. These firms tend to sell their smaller divisions do, their investment behavior changes relative to 1979: it more closely resembles that of their stand-alone industry peers. The remaining 57 (35%) firms were acquired or (in two cases) liquidated.
Notes: "January 1998."

JEL no. G3, G31, L22.

Includes bibliographical references (p. 30-31).

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