The Dark Side of Internal Capital Markets Ii : Evidence from Diversified Conglomerates
This paper is an empirical examination of capital allocation in a sample of 165 diversifiedquot; conglomerates in 1979. I find that divisions in high-Q manufacturing industries tend to investquot; less than their stand-alone industry peers, while divisions in low-Q manufacturing industries tendquot; 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 aquot; conglomerate's smaller divisions. It is also more pronounced in firms in which management hasquot; small equity stakes suggesting that agency problems between corporate headquarters andquot; investors are at the root of the problem. By 1994, only 53 (32%) of these firms continue to bequot; free-standing diversified conglomerates. Fifty-five (33%) choose to sell off unrelated divisionsquot; 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 theirquot; stand-alone industry peers. The remaining 57 (35%) firms were acquired or (in two cases)quot; liquidated