Handbook of Corporate Finance Empirical Corporate Finance Volume 1

Ch. 8: Conglomerate Firms and Internal Capital Markets 467
Ta b l e 2 A

Total Mergers and

acquisitions

Asset sales

Full segment Partial segment

Reallocation rates across and within industries
Full period: 1974–1992

Number of plants reallocated 35,291 17,720 8,556 9,015

Average annual % of plants reallocated 3.89% 1.95% 0.95% 0.99%

% Plants sold to buyer inside industry

Same three-digit SIC code 56.8% 54.1% 55.5% 63.1%

Same four-digit SIC code 47.7% 44.9% 47.9% 53.0%

Average plant size $30,332 $28,435 $30,916 $33,506

(Real $ in thousands,

value of shipments)

Average industry plant size $33,790 $34,569 $36,440 $37,574

(Real $ in thousands,

value of shipments)

a positive demand shock(δ > 0 ). Most importantly, a plant’s probability of being sold
is higher if the firm has more productive operations in other industries(φ > 0 ).The
probability of being sold further increased if these more productive operations are in in-
dustries which have received a positive demand shock(θ < 0 ). The last two finding are
consistent with the simple neoclassical model but and do not suggest an agency model
in which the firm retains and subsidizes inefficient plants using resources generated by
more successful divisions.
MP also find that there is negative relation between the probability that a plant is sold
and the share of the firm’s output produced by the segment to which the plant belongs.
The finding is consistent with the notion that diversified firms divest from their smallest
and least productive divisions and redeploy their assets.
MP also examine who purchases plants and firms and find that the probability of a
purchase goes up with the buyer’s productivity. When they examine the productivity
of the plants after the purchase, MP find that the change in productivity increases with
difference between the buyer’s productivity and purchased plant’s productivity. In sum,
the evidence is consistent with transfers of assets going from less to more productive
firms—especially when industries receive positive demand shocks.
More recently,Maksimovic, Phillips and Prabhala (2006)show that acquirers sell
about 40% of the target’s plants in the four years after the acquisition. The sold plants
tend to be those in the target’s peripheral divisions. The plants that are kept increase in
productivity after the acquisition, the plants that are sold do not. This pattern is consis-
tent with the hypothesis that acquirers keep the assets which they can exploit efficiently
and that they economize on managerial attention by selling or closing the assets that
they cannot exploit efficiently.
Taken together, plant-level evidence suggests that the direction and timing of sales of
corporate assets is consistent with an efficient allocation of resources within the firm.