RFS Advance Access originally published online on September 23, 2009
Review of Financial Studies 2010 23(2):581-599; doi:10.1093/rfs/hhp071
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Evidence on the Dark Side of Internal Capital Markets
University of Southern California
Harvard Business School and NBER
Send correspondence to Oguzhan Ozbas at the University of Southern California, Department of Finance & Business Economics, Marshall School of Business, University Park Campus, Building HOH 514, Mail Code: 0804, Los Angeles, CA 90089; telephone: 213-740-0781; fax: 213-740-6650. E-mail: ozbas{at}usc.edu
JEL Classification: D21, D23, G31
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Abstract |
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This article documents differences between the Q-sensitivity of investment of stand-alone firms and unrelated segments of conglomerate firms. Unrelated segments exhibit lower Q-sensitivity of investment than stand-alone firms. This fact is driven by unrelated segments of conglomerate firms that tend to invest less than stand-alone firms in high-Q industries. This finding is robust to matching on industry, year, size, age, and profitability. The differences are more pronounced in conglomerates in which top management has small ownership stakes, suggesting that agency problems explain the investment behavior of conglomerates.
This article is an extensive reworking of "The Dark Side of Internal Capital Markets II: Evidence from Diversified Conglomerates," National Bureau of Economic Research Working Paper No. 6352. We are grateful to the National Science Foundation, the MIT Financial Services Research Center, the Harvard Business School Division of Research, the Walter A. Rosenblith Fellowship Fund, and the Marshall General Research Fund for financial support and to numerous seminar participants for their comments on the prior version of the article. Judy Chevalier, Robert Gertner, Julio Rotemberg, Henri Servaes, and Jeremy Stein provided very useful feedback on the prior version of this article, as did Michael Weisbach (the editor) and an anonymous referee on the present version.