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Resource Allocation within Firms and Financial Market Dislocation: Evidence from Diversified Conglomerates

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Listed:
  • Gregor Matvos
  • Amit Seru

Abstract

We argue and demonstrate that resource allocation within firms' internal capital markets provides an important force countervailing financial market dislocation. We estimate a structural model of internal capital markets to separately identify and quantify the forces driving the reallocation decision and illustrate how these forces interact with external capital market stress. The weaker (stronger) division obtains too much (little) capital, as though it is 12% (9%) more (less) productive than it really is. Out-of-sample simulated data are consistent with the actual data showing that internal capital markets offset financial market stress during the recent financial crisis by 16%–30%.

Suggested Citation

  • Gregor Matvos & Amit Seru, 2014. "Resource Allocation within Firms and Financial Market Dislocation: Evidence from Diversified Conglomerates," The Review of Financial Studies, Society for Financial Studies, vol. 27(4), pages 1143-1189.
    • Handle: RePEc:oup:rfinst:v:27:y:2014:i:4:p:1143-1189.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhu005
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    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; 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

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