454 V. Maksimovic and G. Phillips
δ>0, indicating that belonging to conglomerate segments reduces a segment’s financ-
ing constraints. The effect is particularly striking for the rate of acquisitions, which
is considerably higher for conglomerates segments, even the ones predicted to run a
financing deficit. In further analysis MP show that this effect is greater for the more
efficient conglomerate segments and that subsequent to acquisition the acquired plants
either maintain or improve their productivity on average. Thus, using LRD data and
using TFP together with industry conditions as a measure of investment opportunities
MP find no evidence for a negative effect of the internal financial market on resource
allocation.^27
More generally,Maksimovic and Phillips (2002)argue that specifications such as(5)
above may be problematical since (a) the decision to become a conglomerate is endoge-
nous and there is likely to be selection bias and (b) the investment of a conglomerate
segment does not depend in the same way on investment opportunities as that of a con-
glomerate firm which maximizes value across different segments. Thus, the estimate of
growth opportunities derived from a single-firm Tobin’sqs may be an inappropriate for
the study of investment by conglomerate segments.
4.2. Industry studies
Four case-studies exploring the workings of internal capital markets in specific indus-
tries provide another form of evidence on the workings of internal capital markets is
provided by.Lamont (1997)studies investment decisions of diversified oil companies
following the oil price shock of 1986 when oil prices plunged by over 50%.Khanna
and Tice (2001)study the responses of diversified in response to Wal-Mart’s entry into
their market.Campello (2002)studies banking.Guedj and Scharfstein (2004)analyze
the effect of organizational scope on the development strategies and performance of
biopharmaceutical firms.
The oil price drop of 1986 provides a natural experiment for the effect of external
demand shocks on a conglomerates internal capital market. Lamont identifies approxi-
mately 40 non-oil segments owned by 26 oil companies. He tests whether the investment
of these non-oil segments of oil firms segments depends on the firm’s internal capital
market by comparing their capital expenditures with the capital expenditures of similar
segments owned by firms less-dependent on the price of oil. Lamont shows that fol-
lowing a significant negative oil price shock, non-oil segments owned by oil companies
significantly cut their investment in 1986 compared to the control group of segments not
owned by oil companies. Thus, firm-level adverse shock in the oil segment was trans-
mitted to the other segments. Moreover, Lamont finds evidence that the oil companies
overinvested in their non-oil segments in prior to the oil price drop.
(^27) Maksimovic and Phillips (2007)do not have data on prices paid for the acquisitions. Thus, they cannot
determine if the observed increases in productivity are enough to compensate the acquiring firms for the costs
of the acquisitions.