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Internal capital market subsidies and industry downturns


  • We thank the editor, Robert Faff, two anonymous referees, and Terry Keasler for helpful comments.


We examine whether multisegment firms tend to subsidize operations doing business in industries that experience a major downturn in investment opportunities. The results provide little evidence of subsidization. The likelihood of discontinuation of multisegment operations in these industries does not statistically differ from that of single-segment operations. Similarly, patterns of capital expenditures after the shock do not materially deviate between multisegment and single-segment operations. These results indicate that the internal capital markets of multisegment firms are no less (and no more) efficient than that of single-segment firms in their reaction to a shock to investment opportunities.