Conglomerate Firms, Internal Capital Markets and the Theory of the Firm

This article reviews the conglomerate literature, with a focus on recent papers that have cast strong doubt on the hypothesis that conglomerate firms destroy value on average when compared to similar stand-alone firms. Recent work has shown that investment decisions by conglomerate firms are consistent with value maximization; conglomerate firms trade at an average premium relative to single-segment firms when value weighting; and the valuation premia and discounts, both for conglomerates and single-segment firms, are driven by differences in the production of unique differentiated products. A profit-maximizing theory of the firm that considers how firms select their organizational structure can explain these recent findings and much of the large variation in findings in the conglomerate literature. We also review the literature showing how market imperfections create additional benefits and costs for internal capital markets and a potential for managerial distortions.

[1]  D. Monk,et al.  Apples to Apples: The Economic Benefit of Corporate Diversification , 2012 .

[2]  Vikram Nanda,et al.  Internal Capital Markets and Corporate Refocusing , 2000 .

[3]  F. Kramarz,et al.  Why) Are Internal Labor Markets Active in French Business Groups , 2014 .

[4]  R. Gopalan,et al.  Conglomerates and Industry Distress , 2008 .

[5]  John G. Matsusaka,et al.  Corporate Diversification, Value Maximization, and Organizational Capabilities , 2001 .

[6]  Henri Servaes,et al.  The Cost of Diversity: The Diversification Discount and Inefficient Investment , 1999 .

[7]  Matthew T. Billett,et al.  Cross-Subsidies, External Financing Constraints, and the Contribution of the Internal Capital Market to Firm Value , 2003 .

[8]  Vojislav Maksimovic,et al.  Do Conglomerate Firms Allocate Resources Inefficiently Across Industries? Theory and Evidence , 2002 .

[9]  Juan Santaló,et al.  Competition from Specialized Firms and the Diversification-Performance Linkage , 2008 .

[10]  G. Phillips,et al.  R&D and the Incentives from Merger and Acquisition Activity , 2012, Review of Financial Studies.

[11]  Amit Seru.  Firm Boundaries Matter: Evidence from Conglomerates and R&D Activity , 2010 .

[12]  H. Stanley,et al.  On the Size Distribution of Business Firms , 2008 .

[13]  Liu Yang.  The Real Determinants of Asset Sales , 2006 .

[14]  G. Phillips,et al.  Increased debt and industry product markets an empirical analysis , 1995 .

[15]  Matthew T. Billett,et al.  Cross Subsidies, External Financing Constraints, and the Contribution of the Internal Capital Market to Firm Value , 2001 .

[16]  Simi Kedia,et al.  Explaining the Diversification Discount , 1999 .

[17]  René M. Stulz,et al.  Are Internal capital Markets Efficient , 1998 .

[18]  René M. Stulz,et al.  Corporate Acquisitions , Diversification , and the Firm ’ s Lifecycle , 2014 .

[19]  René M. Stulz,et al.  Tobin's q, Corporate Diversification, and Firm Performance , 1993, Journal of Political Economy.

[20]  Henri Servaes,et al.  The Cost of Diversity : The Diversification Discount and Inefficient Investment , 1997 .

[21]  Vojislav Maksimovic,et al.  The Market for Corporate Assets: Who Engages in Mergers and Asset Sales and are There Efficiency Gains? , 2000 .

[22]  J. Stein,et al.  Internal Capital Markets and the Competition for Corporate Resources , 1995 .

[23]  Sheri Tice,et al.  The Bright Side of Internal Capital Markets , 2001 .

[24]  Belén Villalonga,et al.  Does Diversification Create Value in the Presence of External Financing Constraints? Evidence from the 2008–2009 Financial Crisis , 2010 .

[25]  T. Khanna,et al.  Why Focused Strategies May Be Wrong for Emerging Markets , 1997 .

[26]  R. Coase.  The Nature of the Firm , 1937 .

[27]  Vojislav Maksimovic,et al.  Capital structure in repeated oligopolies , 1988 .

[28]  M. C. Jensen,et al.  The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems , 1993, A Theory of the Firm.

[29]  G. Phillips,et al.  Post-Merger Restructuring and the Boundaries of the Firm , 2008 .

[30]  G. Phillips,et al.  The Industry Life Cycle and Acquisitions and Investment: Does Firm Organization Matter? , 2005 .

[31]  M. C. Jensen,et al.  The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems , 1993, A Theory of the Firm.

[32]  O. Ozbas,et al.  Integration, Organizational Processes and Allocation of Resources , 2005 .

[33]  Belén Villalonga.  Does Diversification Cause the 'Diversification Discount'? , 2000 .

[34]  Resource Allocation within Firms and Financial Market Dislocation: Evidence from Diversified Conglomerates , 2011 .

[35]  Vojislav Maksimovic,et al.  Conglomerate Firms and Internal Capital Markets , 2006 .

[36]  Markus Glaser,et al.  Opening the Black Box: Internal Capital Markets and Managerial Power: Opening the Black Box , 2013 .

[37]  Fernando Anjos,et al.  Shopping for Information? Diversification and the Network of Industries , 2014, Manag. Sci..

[38]  E. Ofek,et al.  Diversification's effect on firm value , 1995 .

[39]  Toni M. Whited.  Is It Inefficient Investment that Causes the Diversification Discount , 2001 .

[40]  João F. Gomes,et al.  Optimal Diversification: Reconciling Theory and Evidence , 2004 .

[41]  Valentin Dimitrov,et al.  Corporate Diversification and Credit Constraints: Real Effects across the Business Cycle , 2006 .

[42]  D. Scharfstein.  The Dark Side of Internal Capital Markets Ii: Evidence from Diversified Conglomerates , 1998 .

[43]  Evgeny Lyandres.  Strategic Cost of Diversification , 2007 .

[44]  Rebecca N. Hann,et al.  Corporate Diversification and the Cost of Capital , 2012 .

[45]  J. Graham,et al.  Does Corporate Diversification Destroy Value? , 2001 .

[46]  Markus Glaser,et al.  Opening the Black Box: Internal Capital Markets and Managerial Power , 2013 .

[47]  Gerard Hoberg,et al.  Text-Based Network Industries and Endogenous Product Differentiation , 2010, Journal of Political Economy.

[48]  Belen Villalonga,et al.  Diversification Discount or Premium? New Evidence from the Business Information Tracking Series , 2004 .

[49]  D. Robinson,et al.  Market Structure, Internal Capital Markets, and the Boundaries of the Firm , 2006 .

[50]  Todd A. Gormley,et al.  Growing Out of Trouble? Corporate Responses to Liability Risk , 2010 .

[51]  Cláudia Custódio.  Mergers and Acquisitions Accounting Can Explain the Diversi…cation Discount , 2009 .

[52]  Geoffrey A. Tate,et al.  The Bright Side of Corporate Diversification: Evidence from Internal Labor Markets , 2012, The review of financial studies.

[53]  M. C. Jensen,et al.  Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers , 1999 .

[54]  R. Duchin,et al.  Divisional Managers and Internal Capital Markets , 2013 .

[55]  C. Fumagalli,et al.  The Deep-Pocket Effect of Internal Capital Markets , 2009 .