Handbook of Corporate Finance Empirical Corporate Finance Volume 1

Chapter 8

CONGLOMERATE FIRMS AND INTERNAL CAPITAL MARKETS*

VOJISLAV MAKSIMOVIC
Robert H. Smith School of Business, University of Maryland, College Park, MD 20742, USA
e-mail:[email protected]

GORDON PHILLIPS
Robert H. Smith School of Business and NBER, University of Maryland, College Park, MD 20742, USA
e-mail:[email protected]

Contents

Abstract 424
Keywords 424

1. Introduction 425


2. The conglomerate discount 426
   2.1. Documenting the discount: Early research 426
   2.2. Initial caveats: The data 430
   2.3. Self-selection and the endogeneity of the decision to become a conglomerate 433


3. Theory explaining the conglomerate discount and organizational form 436
   3.1. Efficient internal capital markets 438
   3.2. Conglomerates and organizational competencies 439
   3.3. Diversification and the failure of corporate governance 439
   3.4. Diversification and the power within the firm 441
   3.5. Neoclassical modelof conglomerates and resource allocation 443


4. Investment decisions of conglomerate firms 450
   4.1. Investment–cash flow sensitivity 450
   4.2. Industry studies 454
   4.3. Efficient internal capital markets 456
   4.4. Bargaining power within the firm and differential investment opportunities 458
   4.5. Investment under a profit—maximizing neoclassical model 461
   4.6. Mergers and acquisitions, divestitures and spinoffs 466
   4.6.1. Diversified firms and the market for assets 466
   4.6.2. Spinoffs 469


5. Conclusions: What have we learned? 471

*We thank Espen Eckbo and N.R. Prabhala for helpful comments.

Handbook of Corporate Finance, Volume 1
Edited by B. Espen Eckbo
Copyright©2007 Elsevier B.V. All rights reserved
DOI: 10.1016/S1873-1503(06)01008-7