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Misallocation of Internal Funds to Loss-Making Zombie Businesses in the Electronics Industry

In: Excess Capacity and Difficulty of Exit

Author

Listed:
  • Sumio Saruyama

    (Japan Center for Economic Research)

  • Peng Xu

    (Hosei University)

Abstract

Linking segment employment to segment investment in Japanese electronics firms, we find that segment investment increases with segment employment irrespective of segment operating profitability. We show that the internal capital market equalizes the impacts of cash flow across segments. However, the internal capital market does not cut back on investments in loss-making segments. Moreover, investments in all segments increase even when the whole firm is in deficit. Nevertheless, segments with better investment opportunities do not invest more. Not surprisingly, investment in a deficit segment exacerbates subsequent segment profitability and segment asset turnover. Likewise, single-segment firms also have excess capacity, whereas they prolong unnatural investment.

Suggested Citation

  • Sumio Saruyama & Peng Xu, 2021. "Misallocation of Internal Funds to Loss-Making Zombie Businesses in the Electronics Industry," SpringerBriefs in Economics, in: Excess Capacity and Difficulty of Exit, chapter 0, pages 39-69, Springer.
    • Handle: RePEc:spr:spbchp:978-981-16-4900-4_3
    DOI: 10.1007/978-981-16-4900-4_3
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