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Do Conglomerate Firms Allocate Resources Inefficiently Across Industries? Theory and Evidence
Abstract
We develop a profit‐maximizing neoclassical model of optimal firm size and growth across different industries based on differences in industry fundamentals and firm productivity. In the model, a conglomerate discount is consistent with profit maximization. The model predicts how conglomerate firms will allocate resources across divisions over the business cycle and how their responses to industry shocks will differ from those of single‐segment firms. Using plant level data, we find that growth and investment of conglomerate and single‐segment firms is related to fundamental industry factors and individual segment level productivity. The majority of conglomerate firms exhibit growth across industry segments that is consistent with optimal behavior.
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Citations
Cites
Coase, R. H. (1937) · Economica · doi:10.1111/j.1468-0335.1937.tb00002.x · Cited by 23,972
On the Size Distribution of Business Firms
Lucas, R. E. (1978) · The Bell Journal of Economics · doi:10.2307/3003596 · Cited by 3,236
Cited by
Syverson, C. (2011) · Journal of Economic Literature · doi:10.1257/jel.49.2.326 · Cited by 2,942
Financial and Legal Constraints to Growth: Does Firm Size Matter?
BECK, T., DEMIRGÜÇ‐KUNT, A., & MAKSIMOVIC, V. (2005) · The Journal of Finance · doi:10.1111/j.1540-6261.2005.00727.x · Cited by 2,557
Self-citationControlling for endogeneity with instrumental variables in strategic management research
Bascle, G. (2008) · Strategic Organization · doi:10.1177/1476127008094339 · Cited by 1,133
Growing out of trouble? Corporate responses to liability risk
Gormley, T. A., & Matsa, D. A. (2011) · Review of Financial Studies · doi:10.1093/rfs/hhr011 · Cited by 690
Campello, M. (2002) · The Journal of Finance · doi:10.1111/1540-6261.00512 · Cited by 474
Metadata
- Authors
- Maksimovic, V., & Phillips, G.
- Venue
- The Journal of Finance
- Publisher
- Wiley
- Published
- 2002-04
- Volume
- 57
- Issue
- 2
- Pages
- 721-767
- ISSN
- 0022-1082 (ISSN-L)
- 1540-6261
- OpenAlex
- W2138246053
- Cited by
- 758
- References
- 2
- FWCI
- 110.84
- Type
- journal article
- Language
- en
- Open access
- closed
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Contains information from the Semantic Scholar Academic Graph Datasets, made available under the ODC Attribution License (ODC-BY 1.0).
Semantic Scholar’s data is described in: Kinney, R., et al. (2023). The Semantic Scholar Open Data Platform. arXiv:2301.10140.
