Journal of Financial and Quantitative Analysis Vol. 59 No. 1 2024
Cross-Subsidization in Conglomerate Firms: Evidence from Government Spending Shocks
Abstract
Exploiting demand shocks from changes in federal government spending, we examine how the organizational structure of a firm affects its investment behavior. Government spending shocks affect the investment of government-dependent conglomerate segments less than matched stand-alone firms. Investment also increases in lower government-dependent segments when other segments within the same firm experience positive demand shocks, indicating cross-subsidization between segments. We further show that this cross-subsidization leads to worse operating performance and increases the diversification discount. Our findings are robust after addressing the endogeneity of government spending.
- DOI
- 10.1017/s0022109022001004
- Volume
- 59
- Issue
- 1
- Pages
- 339-368
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref