Spillovers inside Conglomerates: Incentives and Capital

Using hand-collected data on divisional managers at conglomerates, we find that a change in industry surplus in one division generates large spillovers on managerial payoffs in other divisions of the same firm. These spillovers arise only within the boundaries of a conglomerate but not between standalone firms that match conglomerates’ divisions. The intra-firm spillovers increase when conglomerates have excess cash and when managers have more influence over its distribution, but decline in the presence of strong shareholder governance. These spillovers are associated with weaker performance and lower firm value. Our evidence is consistent with simultaneous cross-subsidization via managerial payoffs and capital budgets and suggests that these practices arise in similar firms.