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| Author: | Brusco, S. Panunzi, F. |
| Title: | Reallocation of corporate resources and managerial incentives in internal capital markets |
| Journal: | European Economic Review
2005 : APR, VOL. 49:3, p. 659-681 |
| Index terms: | Capital markets Conglomerate companies Incentives Managers Models |
| Language: | eng |
| Abstract: | Diversified firms often trade at a discount with respect to their focused counterparts. This paper shows that diversification can destroy value even when resources are efficiently allocated ex-post. When managers derive utility from the funds under their purview, moving funds across divisions may diminish their incentives. The ex-ante reduction in managerial incentives can more than offset the increase in firm value due to the ex-post efficient reallocation of funds. This effect is robust to the introduction of monetary incentives. Moreover, it is shown that asymmetries in size and growth prospects increase the diversification discount. |
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