Conglomerate Firms Research Articles

The Industry Life Cycle and Acquisitions and Investment: Does Firm Organization Matter?

We examine the effect of financial dependence on acquisition and investment within existing industries by single-segment and conglomerate firms for industries undergoing different long-run changes in industry conditions. Conglomerates and single-segment firms differ more for within-industry acquisitions, while capital expenditure rates are similar across organizational type. In particular, 36 percent of within-industry growth by conglomerate firms in growth industries is from intra-industry acquisitions versus nine percent for single-segment firms. Financial dependence, a deficit in a segment's internal financing, decreases the likelihood of within-industry acquisitions and opening new plants, especially for single-segment firms. These effects are mitigated for conglomerates in growth industries and also for firms that are publicly traded. We also find that plants acquired by conglomerate firms in growth industries increase in productivity post-acquisition. In declining industries, plants of segments that are financially dependent are less likely to be closed by conglomerate firms. These findings persist after controlling for firm size and segment productivity. The results are consistent with the comparative advantages of different firm organizations differing across long-run industry conditions.

Bank Consolidation, Internationalization, and Conglomeration: Trends and Implications for Financial Risk

This paper documents trends in bank activity, consolidation, internationalization, and financial firm conglomeration with data on more than 100 countries, and explores the extent to which financial firm risk and systemic risk potential in banking are related to consolidation and conglomeration. The relationship between consolidation, conglomeration and financial risk is documented using financial data on the largest 500 financial firms worldwide and on large banks in about 90 countries. We find that (a) large conglomerate firms did not exhibit levels of risk‐taking lower than smaller and specialized firms in 1995, while they exhibited higher levels of risk‐taking in 2000; (b) highly concentrated banking systems exhibited levels of systemic risk potential higher than less concentrated systems during the 1993–2000 period, and this relationship has strengthened during the 1997–2000 period. We outline research directions aimed at explaining why bank consolidation and conglomeration may not necessarily yield either safer financial firms or more resilient banking systems.

The Agency Problems, Firm Performance and Monitoring Mechanisms: the evidence from collateralised shares in Taiwan

This paper indicates that there is an inverse relationship between collateralised shares and firm performance. We further show that this inverse relationship exists only in conglomerate firms. These findings imply that agency problems resulting from shares used as collateral by boards of directors are more serious in conglomerate firms than in non‐conglomerate firms. Moreover, we provide evidence that monitoring by institutional investors, creditors and dividend policy can effectively reduce the agency problems of shares used as collateral and thus can improve firm performance.

Management turnover in subsidiaries of conglomerates versus stand-alone firms

We compare turnover of subsidiary managers inside conglomerate firms to turnover of CEOs of comparable stand-alone firms. We find that, compared to turnover of CEOs, subsidiary manager turnover is significantly more sensitive to changes in performance and significantly more likely following poor performance. For subsidiary managers, the relation between turnover and performance is significantly stronger when the subsidiary operates in an industry that is related to the parent's primary industry. Results suggest that boards of directors are relatively ineffective disciplinarians of CEOs and despite their other apparent failings, conglomerate firms have relatively strict disciplining mechanisms for subsidiary managers.

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

ABSTRACTWe 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.

Corporate Borrowing and Financing Constraints

This Paper adopts an optimal contracting approach to internal capital markets. We study the role of headquarters in contracting with outside investors, with a focus on whether headquarters eases or amplifies financing constraints compared to decentralized firms where individual project managers borrow separately. If projects differ in their ex post cash-flows, headquarters makes greater repayments to investors than decentralized firms, which eases financing constraints. Effectively, headquarters then subsidizes low-return projects with high-return projects' cash. On the other hand, headquarters may, by pooling cash flows and accumulating internal funds, make investments without having to return to the capital market. Without any capital market discipline, however, it is harder for outside investors to force the firm to disgorge funds, which tightens financing constraints ex ante. Both the costs and benefits of internal capital markets are endogenous and arise as part of an optimal financial contract. Our results are consistent with empirical findings showing that conglomerate firms trade at a discount relative to a comparable portfolio of stand-alone firms.

Congress, The U.S. Supreme Court And Must-Carry Policy: A Flawed Economic Analysis

The Cable Television Consumer Protection and Competition Act of 1992, which requires cable operators to carry the signals of local broadcast television stations, was hailed by supporters as a measure that would preserve the economic viability of the local independent broadcaster by unlocking the anticompetitive grip that the local cable company places on access to its system. In upholding the Act in 1997, the United States Supreme Court seemed to ignore the degree to which the cable and broadcast industries have become vertically integrated. In the end, local independent stations became economically viable not because they were guaranteed carriage on a cable system, but because they represented a practical programming outlet for conglomerate firms with large investments in content production. This article recommends that Congress repeal the Act.

Market Discipline and Incentive Problems in Conglomerate Firms with Applications to Banking

This paper analyzes the optimality of conglomeration. We show that the potential benefits of conglomeration depend critically on the effectiveness of market discipline for stand-alone activities. Effective market discipline reduces the benefits of conglomeration. With ineffective market discipline of stand-alone activities, conglomeration would further undermine market discipline, but may nevertheless be beneficial. In particular, when rents are not too high, the diversification benefits of conglomeration dominate the negative incentive effects. A more competitive environment therefore induces conglomeration. We also show that introducing internal cost-of-capital allocation schemes creates internal market discipline that complements the weak external market discipline of a conglomerate. Our analysis sheds light on the Barings debacle and other recent developments in the banking sector. Journal of Economic Literature Classification Numbers: G20, G21, G34.

‘Chinese Walls’

The handling of conflicts of interest has become an increasingly important concern for modern professional advisers, in particular lawyers, accountants, brokers and financial advisors. This concern has become exacerbated because of the convergence of a number of factors, namely the bureaucratisation of many areas of professional advisory work, the emergence of megafirms and large national and multi‐national partnerships dealing with this work, coupled with a customer base dominated by large corporations and governments. Indeed, it is the demand of these customers that partly accounts for the emergence of larger advisory firms. However, the outcome of this process has inevitably created severe conflicts of interest problems for such conglomerate professional practices and large advisory firms, problems that they have attempted to contain through the use of what has become commonly known as Chinese walls.

Do Conglomerate Firms Allocate Resources Inefficiently?

We develop a profit-maximizing neoclassical model of optimal firm size and growth across different industries. 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. We test our model and find that growth of conglomerate and single-segment firms is related to fundamental industry factors and individual firm-segment productivity consistent with our simple neoclassical theory. Conglomerates grow less in a particular segment if their other segments are more productive and if their other segments experience a larger positive demand shock. We find that the growth rates of peripheral segments are very sensitive to relative productivity and that conglomerates sharply cut the growth of unproductive peripheral segments. We do find some evidence consistent with agency problems for conglomerate firms that are broken up. However, the majority of conglomerate firms exhibit growth across business segments that is consistent with optimal behavior.

Corporate Takeovers and Productivity.

The concept of relative plant productivity and its measurement using census LRD data productivity and changes in ownership of manufacturing plants, Donald Siegel takeovers and corporate overhead, with Donald Siegel leveraged buyouts, with Donald Siegel US and foreign mergers and LBOs, 1988-90 the dismantling of conglomerate firms airline mergers, with Moshe Kim.

The Decline and Fall of the Conglomerate Firm in the 1980s: The Deinstitutionalization of an Organizational Form

The Decline and Fall of the Conglomerate Firm in the 1980s: The Deinstitutionalization of an Organizational Form

Are Strikes Less Effective in Conglomerate Firms?

Are Strikes Less Effective in Conglomerate Firms?

Are Strikes Less Effective in Conglomerate Firms?

The author develops an extension of the Ashenfelter-Johnson model of union wage bargaining to account for how diversification can improve a firm's ability to take strikes and therefore reduce wage settlements. To test the model, a wage equation is derived that is conditioned on the occurrence of a strike and is then estimated using union wage settlement data for 15 manufacturing firms covering contract settlements from 1954 to 1988. The estimation results support organized labor's contention that conglomerate firms enjoy a significant bargaining advantage over labor unions.

Why Are Synergies Non‐universal? Consequent Tendencies in the Evolution of a Firm

Consider the case of Procter and Gamble (P&G), when it ships carloads combining diapers and other paper products. It saves transportation costs (about 10% of sales) relative to a firm that sells only diapers. This is one example of synergies among divisions that seem to explain the superior performance of companies like P&G. Examples of other related companies are General Foods, General Mills, Pillsbury, Dupont, 3M, Westinghouse etc., each of which try to exploit some form of synergy or other. But at the same time, managers also find that there are several conglomerate firms comprised of unrelated business units which are also performing well. Examples of conglomerates in this category include ITT, Rockwell International, Dart Industries, Signal Companies, United Technologies, Gulf and Western Industries, Tenneco, Textron, USX etc. An erudite manager is thus faced with a dilemma. Are synergies real? If they exist, why are they not ubiquitous? Why and when is unrelated growth pattern an attractive alternative?

The Effect of Changes in Firm Diversification on Union Wage Settlements for 15 Major U. S. Industrial Firms

A well known argument is that conglomerate firms may exploit their ability to cross-subsidize price wars for the purpose of engaging in predatory pricing.' A similar argument advanced by organized labor is that conglomerate firms can often outlast unions during strikes because they can cross-subsidize strike costs indefinitely [1; 15; 17]. This cross-subsidizing of strike costs, labor argues, greatly reduces the effectiveness of striking as a bargaining weapon, resulting in lower wage settlements for the union. Another fear articulated by organized labor is that conglomerates can simply eliminate divisions with troublesome unions. Since this threat is perceived by most unions as credible it may further increase the bargaining power of the firm [19]. While the opportunity to cross-subsidize strike costs or to eliminate troublesome divisions clearly exists for many conglomerates, there is no empirical evidence that they engage in these activities or that they enjoy lower wage settlements [12; 15].' This paper tests the proposition that diversification efforts by the firm can lead to lower wage settlements. Unlike earlier studies that examine the effect of a firm's conglomerate nature on wage levels, this paper examines how recent changes in the firm's level of diversification may affect wage settlements. The remainder of the paper is outlined as follows. In section I several key aspects of organized labor's argument are discussed and a formal testable hypothesis is proposed. Section II proposes a simple empirical test of the hypothesis. Section III discusses the data and the construction of key variables. Section IV reports and interprets the results of the regressions. Section V concludes the paper.

Conglomerate mergers, internal organization and competition policy

A significant feature of recent developments in industrial structure and in business strategies has been the growth of conglomerate firms, often as a result of mergers. These raise important issues concerning their effects on competition and economic efficiency. These issues are not always handled with confidence or consistency by the regulatory authorities, as analysis of relevant reports by the Monopolies and Mergers Commission indicates. The paper argues that it is important to explore the nature of internal organization and resource allocation decisions within conglomerates as an aid to predicting their likely economic effects. It is shown that Williamson's M-form model is not an effective description of the organization and practices of all conglomerates. Rather, it is suggested that three main types of internal economic systems can be identified, each of which has different organizational features and gives rise to different predictions about the overall effects on competition and economic efficiency.

Diversification and market performance

Recent theoretical research indicates that diversification may affect industry profitability for reasons (e.g., improved efficiency and increased entry) other than the exercise of marketpower by conglomerate firms. This paper examines empirically the relationship between diversification (as an element of market structure) and industry profitability using three relatively new measures of diversification. The evidence reported reveals a statistically significant relationship which is consistent with the efficiency and entry hypotheses.

Incentives for Diversification and the Structure of the Conglomerate Firm

In this paper, we examine the proposition that both the structures of conglomerate firms and their merger activities evidence a systematic attempt to diversify income sources and reduce the volatility of firms' profits. We test whether firms that are active in one line of business are more likely to be involved in another, the lower is the correlation between returns to the two activities, and whether, ceteris paribus, the likelihood of merger depends inversely on the correlation of cash flows to the principal activities of thecandidates for merger. We conclude that firms do act as if their goals include firm-level diversification.

Conglomerate Performance Over the Economic Cycle

THE economic efficiency aspects of conglomerate mergers have taken on a degree of importance which is not attached to the economic efficiency aspects of non-conglomerate mergers. As the Monopolies Commission noted in its General Observations on Mergers [9], this is because a pure conglomerate merger, which by definition does not have any immediately observable effect on industry structure, cannot be assessed with respect to its effects on competitive markets in the same way as other types of merger can. There have been several attempts to assess the long term effects of conglomerate entry on industry structure, notably by Utton [15] and Kelly [5] in the UK, and by Goldberg [4], Rhodes [12], and Berry [1] in the USA, but, as these authors would be the first to admit, their conclusions are both tenuous, given the paucity of the data with which they have had to work, and somewhat contradictory between studies. However, all is not lost, for it is possible to assess a pure conglomerate merger with respect to its expected effects on the efficiency with which resources will be used. A number of studies have looked at the comparative performance of conglomerate and non-conglomerate concerns in an attempt to establish just what the effects of conglomeration are on enterprise performance and, by extension, economic efficiency. In the UK, studies by Utton [14], Econtel [3] and Kumps [6] have all compared the performance of conglomerate and non-conglomerate concerns over a given time period. While Utton found no difference between the performance of two such groups, both Econtel and Kumps did find significant evidence that conglomerates outperformed non-conglomerates. So in the UK the balance of the evidence to date would seem to indicate that conglomerates perform at least as well, if not a little better, than non-conglomerate concerns. In the USA too, a number of studies have come out in favour of conglomerate firms. Most important of these studies are those by Weston and Mansinghka [16] and Weston, Smith and Shrieves 117]. But as Mueller [10] has argued, these analyses may be flawed given that they focus on the performance of conglomerate firms during the boom period of the 1960s. Mueller believes that the real test of conglomerate performance is not how