Resource allocation within firms and financial market dislocation: Evidence from diversified conglomerates

Gregor Matvos*, Amit Seru

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

47 Scopus citations

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%.

Original languageEnglish (US)
Pages (from-to)1143-1189
Number of pages47
JournalReview of Financial Studies
Volume27
Issue number4
DOIs
StatePublished - 2014

Keywords

  • D92
  • E22
  • G01
  • G3
  • L21
  • L25

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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