424 V. Maksimovic and G. Phillips
Appendix A. Neoclassical model of resource allocation across industries 472
A.1. Shocks and growth in a single industry 472
A.2. Cross-segment effects and the growth of conglomerates 475
References 477
Abstract
Conglomerate firm production represents more than 50 percent of production in the
United States. Given the size of production by conglomerate firms, understanding the
costs and benefits of this form of organization has important implications. Several stud-
ies have shown that there exists a discount in stock market value of conglomerate firms
relative to single-segment focused firms. This discount represents an economically im-
portant puzzle. Early literature came to the conclusion that the conglomerate discount
was the result of problems with resource allocation and internal capital markets. Recent
empirical literature has found that self-selection by firms with different investment op-
portunities can explain the conglomerate discount. Additional theoretical and empirical
research has shown how a model of profit-maximizing firms with different abilities and
investment opportunities across divisions can explain observed resource allocation by
conglomerate firms.
Keywords
conglomerates, multidivisional firms, firm organization, investment, internal capital
markets.