Journal Article

Resource Allocation within Firms and Financial Market Dislocation: Evidence from Diversified Conglomerates

Gregor Matvos and Amit Seru

in The Review of Financial Studies

Published on behalf of The Society for Financial Studies

Volume 27, issue 4, pages 1143-1189
Published in print April 2014 | ISSN: 0893-9454
Published online February 2014 | e-ISSN: 1465-7368 | DOI: https://dx.doi.org/10.1093/rfs/hhu005
Resource Allocation within Firms and Financial Market Dislocation: Evidence from Diversified Conglomerates

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  • Intertemporal Choice and Growth
  • Macroeconomics: Consumption, Saving, Production, Employment, and Investment
  • Economics
  • Corporate Governance
  • Firm Objectives, Organization, and Behaviour

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We argue and demonstrate that resource allocation within firms' internal capital markets provides an important force countervailing financial market dislocation. We estimate a structural model of internal capital markets to separately identify and quantify the forces driving the reallocation decision and illustrate how these forces interact with external capital market stress. The weaker (stronger) division obtains too much (little) capital, as though it is 12% (9%) more (less) productive than it really is. Out-of-sample simulated data are consistent with the actual data showing that internal capital markets offset financial market stress during the recent financial crisis by 16%–30%.

Keywords: D92; E22; G01; G3; L21; L25

Journal Article.  21150 words.  Illustrated.

Subjects: Intertemporal Choice and Growth ; Macroeconomics: Consumption, Saving, Production, Employment, and Investment ; Economics ; Corporate Governance ; Firm Objectives, Organization, and Behaviour

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