International Trade and the Allocation of Capital within Firms

This paper introduces an internal capital market into a two-factor model of multi-segment frms that features managers' empire building and informational frictionswithin the organization. Our novel theory shows that international trade imposesdiscipline on divisional managers and improves capital allocation across divisions,thereby lowering the conglomerate discount. The theory can explain why exportersexhibit a lower conglomerate discount than non-exporters (a new fact we establish).We exploit the China shock as an exogenous change to competition to confirm themodel's predictions with data on US companies