Resource Allocation within Firms and Financial Market Dislocation: Evidence from Diversified Conglomerates
AbstractWhen external capital markets are stressed they may not reallocate resources between firms. We show that resource allocation within firms' internal capital markets provides an important force countervailing financial market dislocation. Using data on US conglomerates we empirically verify that firms shift resources between industries in response to shocks to the financial sector. We estimate a structural model of internal capital market to separately identify and quantify the forces driving the reallocation decision and how these forces interact with external capital market stress. The frictions in internal capital markets drive a large wedge between productivity and investment: the weaker (stronger) division obtains too much (little) capital, as though it is 12 (9) percent more (less) productive than it really is. The cost of accessing external capital funds quadruple during extreme financial market dislocations, making resource allocation within firms significantly cheaper. The estimated model allows us to simulate the propagation of the 2007/2008 financial market dislocation. The counterfactual out of sample simulated data is remarkably consistent with the actual data and shows that improved resource allocation in internal capital markets offset financial market stress during the recent financial crisis by 16% to 30% relative to firms with no internal capital markets.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17717.
Date of creation: Dec 2011
Date of revision:
Note: CF EFG IO ME PR
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Find related papers by JEL classification:
- D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Financing, Investment, and Capacity
- E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- G01 - Financial Economics - - General - - - Financial Crises
- G3 - Financial Economics - - Corporate Finance and Governance
- L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
- L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jonathan Levin (Stanford University) & Pat Bajari & Lanier Benkard, 2004.
"Estimating Dynamic Models of Imperfect Competition,"
Econometric Society 2004 North American Winter Meetings
627, Econometric Society.
- Patrick Bajari & C. Lanier Benkard & Jonathan Levin, 2007. "Estimating Dynamic Models of Imperfect Competition," Econometrica, Econometric Society, vol. 75(5), pages 1331-1370, 09.
- Bajari, Patrick & Benkard, C. Lanier & Levin, Jonathan, 2007. "Estimating Dynamic Models of Imperfect Competition," Research Papers 1852r1, Stanford University, Graduate School of Business.
- J. Levin & P. Bajari, 2004. "Estimating Dynamic Models of Imperfect Competition," 2004 Meeting Papers 579, Society for Economic Dynamics.
- Patrick Bajari & C. Lanier Benkard & Jonathan Levin, 2004. "Estimating Dynamic Models of Imperfect Competition," NBER Working Papers 10450, National Bureau of Economic Research, Inc.
- William Adams & Liran Einav & Jonathan Levin, 2009.
"Liquidity Constraints and Imperfect Information in Subprime Lending,"
American Economic Review,
American Economic Association, vol. 99(1), pages 49-84, March.
- William Adams & Liran Einav & Jonathan Levin, 2007. "Liquidity Constraints and Imperfect Information in Subprime Lending," NBER Working Papers 13067, National Bureau of Economic Research, Inc.
- Eisfeldt, Andrea L. & Rampini, Adriano A., 2008. "Managerial incentives, capital reallocation, and the business cycle," Journal of Financial Economics, Elsevier, vol. 87(1), pages 177-199, January.
- Hovakimian, Gayané, 2011. "Financial constraints and investment efficiency: Internal capital allocation across the business cycle," Journal of Financial Intermediation, Elsevier, vol. 20(2), pages 264-283, April.
- Almeida, Heitor & Campello, Murillo & Hackbarth, Dirk, 2011.
Journal of Financial Economics,
Elsevier, vol. 102(3), pages 526-558.
- Nicholas Bloom, 2007.
"The Impact of Uncertainty Shocks,"
NBER Working Papers
13385, National Bureau of Economic Research, Inc.
- Stephen P. Ryan, 2012.
"The Costs of Environmental Regulation in a Concentrated Industry,"
Econometric Society, vol. 80(3), pages 1019-1061, 05.
- Stephen Ryan, 2005. "The Costs of Environmental Regulation in a Concentrated Industry," Working Papers 0510, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
- Stephen Ryan, 2006. "The Costs of Environmental Regulation in a Concentrated Industry," 2006 Meeting Papers 9, Society for Economic Dynamics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.