Do Conglomerate Firms Allocate Resources Inefficiently Across Industries? Theory and Evidence


  • Vojislav Maksimovic,

  • Gordon Phillips

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    • Robert H. Smith School of Business, The University of Maryland. A previous draft was circulated and presented with the title “Optimal Firm Size and the Growth of Conglomerate and Single-industry Firms.” This research was supported by NSF Grant #SBR-9709427. We wish to thank the editor, René Stulz, two anonymous referees, John Graham, Robert Hauswald, Sheridan Titman, Anjan Thakor, Haluk Unal, and seminar participants at Carnegie Mellon, Colorado, Harvard, Illinois, Indiana, Maryland, Michigan, Ohio State, the 1999 AFA meetings, the National Bureau of Economic Research and the 1998 Finance and Accounting conference at NYU for their comments. We also wish to thank researchers at the Center for Economic Studies for comments and their help with the data used in this study. The research was conducted at the Center for Economic Studies, U.S. Bureau of the Census, Department of Commerce. The authors alone are responsible for the work and any errors or omissions.


We develop a profit-maximizing neoclassical model of optimal firm size and growth across different industries based on differences in industry fundamentals and firm productivity. In the model, a conglomerate discount is consistent with profit maximization. The model predicts how conglomerate firms will allocate resources across divisions over the business cycle and how their responses to industry shocks will differ from those of single-segment firms. Using plant level data, we find that growth and investment of conglomerate and single-segment firms is related to fundamental industry factors and individual segment level productivity. The majority of conglomerate firms exhibit growth across industry segments that is consistent with optimal behavior.