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Vertical integration to mitigate internal capital market inefficiencies

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  • Devos, Erik
  • Li, He

Abstract

We argue that vertical integration creates operational links between divisions in a conglomerate, which aligns divisional interests, thereby reducing internal competition between divisions. As a result, vertical integration improves the capital allocation efficiency of the internal capital market (ICM). We measure ICM efficiency by innovation output and capital expenditure (CAPX) deviation, and present evidence that higher levels of vertical integration are associated with higher ICM efficiency. Our results are robust to a number of endogeneity tests and the use of alternative measures of vertical integration and ICM efficiency.

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  • Devos, Erik & Li, He, 2021. "Vertical integration to mitigate internal capital market inefficiencies," Journal of Corporate Finance, Elsevier, vol. 69(C).
    • Handle: RePEc:eee:corfin:v:69:y:2021:i:c:s0929119921001152
    DOI: 10.1016/j.jcorpfin.2021.101994
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