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Firm vertical boundaries, internal capital markets, and firm performance
Author(s) -
Shenoy Jaideep
Publication year - 2021
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/eufm.12269
Subject(s) - profitability index , vertical integration , industrial organization , productivity , business , monetary economics , horizontal and vertical , capital allocation line , capital (architecture) , investment (military) , economics , microeconomics , profit (economics) , finance , macroeconomics , history , archaeology , geodesy , politics , political science , law , geography
We investigate how vertical relatedness between business segments of firms affects capital allocation within internal capital markets. Using a battery of tests including exogenous import tariff reductions, we show that investments flow toward segments with better investment opportunities in firms with significant vertical relatedness between segments. This benefit of vertical relatedness is more pronounced in economic environments prone to information problems and in imperfectly competitive industries. Firms with significant inter‐segment vertical relatedness also exhibit superior productivity and operating profitability. Overall, we show that superior capital allocation is a channel through which vertical integration impacts real outcomes of firms.