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Internal Capital Markets, Cross-Subsidization and Product Market Competition

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  • Cestone, Giacinta
  • Fumagalli, Chiara

Abstract

This Paper analyses the interaction between internal capital market allocations and product market competition. It is argued that diversification and divestiture are both rational responses to anticipated changes in the competitive environment. Diversification is the optimal response to an anticipated toughening of competition, whereas divestiture may encourage competitors to adopt collusive pre-commitments. Moreover, thanks to the ability to shift resources across units, a diversified business group can consolidate its market power across industries. Our results yield empirically testable predictions relating the stock-market reaction to diversification announcements and the diversification premium to product market factors.

Suggested Citation

  • Cestone, Giacinta & Fumagalli, Chiara, 2001. "Internal Capital Markets, Cross-Subsidization and Product Market Competition," CEPR Discussion Papers 2935, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:2935
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    References listed on IDEAS

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    Cited by:

    1. Eberl, Stephan, 2008. "Licht und Schatten zentralisierter Kapitalallokation: die Wirkung Interner Kapitalmärkte auf den Unternehmenswert," Hohenheimer Schriften: Rechnungswesen - Steuern - Wirtschaftsprüfung 2008,1, University of Hohenheim, Department of Business Administration.
    2. Giacinta Cestone & Chiara Fumagalli, 2003. "The Strategic Impact of Resource Flexibility in Business Groups," Working Papers 49, Barcelona Graduate School of Economics.
    3. Giacinta Cestone & Chiara Fumagalli, 2003. "Winner-Picking or Cross-Subsidization? The Strategic Impact of Resource Flexibility in Business Groups," CSEF Working Papers 93, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

    More about this item

    Keywords

    business groups; conglomerate discount; cross-subsidization; internal capital markets; product market competition;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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