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Cross-Subsidization in Conglomerate Firms: Evidence from Government Spending Shocks

Published online by Cambridge University Press:  09 September 2022

Darren J. Kisgen Open the ORCID record for Darren J. Kisgen [Opens in a new window]  and
Lei Kong
Darren J. Kisgen*
Affiliation:
Boston College Carroll School of Management
Lei Kong
Affiliation:
University of Alabama Culverhouse College of Business lkong@cba.ua.edu
*
kisgen@bc.edu (corresponding author)
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Abstract

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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 1 , February 2024 , pp. 339 - 368
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank an anonymous referee, Matthew Billett, Thomas Chemmanur, Ran Duchin, Mara Faccio (the editor), Sabatino Silveri, Philip Strahan, and seminar participants at the University of Alabama, the University of Mississippi, and the Financial Management Association Annual Meeting.

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