Reallocation of Capital and Labor within Firms
Swiss Journal of Economics and Statistics volume 152, pages 289–303 (2016)
Understanding how internal capital and labor markets function sheds light on one of the most fundamental questions in economics: what determines the boundaries of the firm? This essay reviews the theoretical and empirical literature on internal capital markets and firm boundaries, focusing in particular on the close link between the two subjects Emphasis is placed on the question of how firms reallocate capital and labor internally across individual firm units in response to plausibly exogenous shocks The essay concludes with directions for future research.
Aghion, P., and J. Tirole (1997), “Formal and Real Authority in Organizations”, Journal of Political Economy, 105, pp. 1–29.
Alchian, A. (1969), “Corporate Management and Property Rights”, in Economic Policy and the Regulation of Corporate Securities, H. Manne, ed., Washington, D.C.
Berger, P., and E. Ofek (1995), “Diversification’s Effect on Firm Value”, Journal of Financial Economics, 37, pp. 39–65.
Bolton, P., and D. Scharfstein (1998), “Corporate Finance, the Theory of the Firm, and Organizations”, Journal of Economic Perspectives, 12, pp. 95–114.
Brusco, S., and F. Panunzi (2005), “Reallocation of Corporate Resources and Managerial Incentives in Internal Capital Markets, European Economic Review, 49, pp. 659–681.
Campa, J., and S. Kedia (2002), “Explaining the Diversification Discount”, Journal of Finance, 57, pp. 1731–1762.
Chevalier, J. (2000), “What Do We Know about Cross-Subsidization? Evidence from the Investment Policies of Merging Firms”, mimeo, University of Chicago
Coase, R. (1937), “The Nature of the Firm”, Economica, 4, pp. 386–405.
Gertner, R., D. Scharfstein, and J. Stein (1994), “Internal versus External Capital Markets”, Quarterly Journal of Economics, 109, pp. 1211–1230.
Giroud, X. (2013), “Proximity and Investment: Evidence from Plant-Level Data”, Quarterly Journal of Economics, 128, pp. 861–915.
Giroud, X., and H. Mueller (2015a), “Capital and Labor Reallocation within Firms”, Journal of Finance, 70, pp. 1767–1804.
Giroud, X., and H. Mueller (2015b), “Firm Leverage, Consumer Demand, and Unemployment during the Great Recession”, mimeo, New York University.
Graham, J., M. Lemmon, and J. Wolf (2002), “Does Corporate Diversification Destroy Value?”, Journal of Finance, 57, pp. 695–720.
Grossman, S., and O. Hart (1986), “The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration”, Journal of Political Economy, 94, pp. 691–719.
Hadlock, C., and J. Pierce (2010), “New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index”, Review of Financial Studies, 23, pp. 1909–1940.
Hart, O., and J. Moore (1990), “Property Rights and the Nature of the Firm”, Journal of Political Economy, 98, pp. 1119–1158.
Holmstrom, B. (1999), “The Firm as a Subeconomy”, Journal of Law, Economics and Organization, 15, pp. 74–102.
Hyland (1997), “Why Firms Diversify: An Empirical Examination”, unpublished doctoral dissertation, Ohio State University.
Inderst, R., and H. Mueller (2003), “Internal versus External Financing: An Optimal Contracting Approach”, Journal of Finance, 58, pp. 1033–1062.
Kaplan, S., and L. Zingales (1997), “Do Financing Constraints Explain Why Investment Is Correlated with Cash Flow?”, Quarterly Journal of Economics, 112, pp. 169–215.
Khanna, N., and S. Tice (2001), “The Bright Side of Internal Capital Markets”, Journal of Finance, 56, pp. 1489–1528.
Klein, B., R. Crawford, and A. Alchian (1978), “Vertical Integration, Appropriable Rents, and the Competitive Contracting Process”, Journal of Law and Economics, 21, pp. 297–326.
Lamont, O. (1997), “Cash Flow and Investment: Evidence from Internal Capital Markets”, Journal of Finance, 52, pp. 83–109.
Lang, L., and R. Stulz (1994), “Tobin’s q, Corporate Diversification, and Firm Performance”, Journal of Political Economy, 102, pp. 1248–1280.
Lewellen, W. (1971), “A Pure Financial Rationale for the Conglomerate Merger”, Journal of Finance, 26, pp. 521–537.
Lins, K., and H. Servaes (1999), “International Evidence on the Value of Corporate Diversification”, Journal of Finance, 54, pp. 2215–2239.
Maksimovic, V., and G. Phillips (2002), “Do Conglomerate Firms Allocate Resources Inefficiently across Industries? Theory and Evidence”, Journal of Finance, 57, pp. 721–767.
Meyer, M., P. Milgrom, and J. Roberts (1992), “Organizational Prospects, Influence Costs, and Ownership Changes”, Journal of Economics and Management Strategy, 1, pp. 9–35.
Mian, A., and A. Sufi (2014), “What Explains the 2007–2009 Drop in Employment?”, Econometrica, 82, pp. 2197–2223.
Rajan, R., H. Servaes and L. Zingales (2000), “The Cost of Diversity: The Diversification Discount and Inefficient Investment”, Journal of Finance, 55, pp. 35–80.
Scharfstein, D. (1998), “The Dark Side of Internal Capital Markets II: Evidence from Diversified Conglomerates”, NBER Working Paper 6352.
Scharfstein, D., and J. Stein (2000), “The Dark Side of Internal Capital Markets: Divisional Rent-Seeking and Inefficient Investment”, Journal of Finance, 55, pp. 2537–2564.
Servaes, H. (1996), “The Value of Diversification during the Conglomerate Merger Wave”, Journal of Finance, 51, pp. 1201–1225.
Shin, H.-H., and R. Stulz (1998), “Are Internal Capital Markets Efficient?”, Quarterly Journal of Economics, 113, pp. 531–552.
Stein, J. (1997), “Internal Capital Markets and the Competition for Corporate Resources”, Journal of Finance, 52, pp. 111–133.
Stein, J. (2003), “Agency, Information and Corporate Investment”, in Handbook of the Economics of Finance, G. Constantinides, M. Harris, and R. Stulz, eds, Amsterdam
Villalonga, B. (2004), “Does Diversification Cause the ‘Diversification Discount’?”, Financial Management, 33, pp. 5–27.
Whited, T. (2001), “Is it Inefficient Investment that Causes the Diversification Discount?”, Journal of Finance, 56, pp. 1667–1691.
Whited, T., and G. Wu (2006), “Financial Constraints Risk”, Review of Financial Studies, 19, pp. 531–559.
Williamson, O. (1975), Market and Hierarchies: Analysis and Antitrust Implications, New York.
About this article
Cite this article
Mueller, H. Reallocation of Capital and Labor within Firms. Swiss J Economics Statistics 152, 289–303 (2016). https://doi.org/10.1007/BF03399429
- boundaries of the firm
- internal capital markets
- capital and labor reallocation