Capital and Labor Reallocation
within Firms
Holger M. Mueller
NYU, NBER, CEPR, & ECGI
Vu Pham
Roadmap
• Part I: Internal Capital Markets and the Boundaries of the Firm
• Part II: Empirical Evidence
• Part III: “Capital and Labor Reallocation within Firms”
• Part IV: What next?
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
2
Part I:
Internal Capital Markets and
the Boundaries of the Firm
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
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Internal Capital Markets and the Boundaries of the Firm
• Coase (1937): “If production could be carried out without any organisation
at all, well might we ask, why is there any organisation?”
•
•
•
Why are there firms?
Why are certain transactions carried out within firms and others between firms?
What determines the boundaries of the firm?
• Coase (1937): transaction costs.
•
•
•
Difficult to write and enforce fully contingent contracts that specify what should happen
in all future situations (“incomplete contracts”).
Firms emerge in response to this inefficiency because a firm’s owner can simply direct
employees what do.
What exactly are the (transaction) costs of contractual incompleteness?
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
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Internal Capital Markets and the Boundaries of the Firm
• Williamson (1975, 1985), Klein, Crawford, and Alchian (1978): hold-up
problem.
•
•
•
Incomplete contracts give rise to ex-post opportunism when there are relationshipspecific investments.
Fear of ex-post expropriation discourages contracting parties from making ex-ante
relationship-specific investments.
How exactly is hold-up behavior mitigated within a firm?
• Grossman and Hart (1986), Hart and Moore (1990) (GHM): property-rights
approach.
•
•
•
•
Bargaining power in ex-post renegotiation derives from asset ownership. Owner has
residual control rights over asset and right to exclude others from its use.
Asset ownership affects incentives to make ex-ante relationship-specific investments.
Party whose investment is relatively more important should own asset. Protection
against ex-post hold-up by other party.
Is GHM model a good way to think about real firms?
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
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Internal Capital Markets and the Boundaries of the Firm
• Critique of GHM.
•
GHM model implies that individual managers should own productive assets.
•
In reality, however, firms—not individual managers—own assets!
•
“[T]his model, despite its express objective to explain the boundaries of the firm, fails
to do so, at least if the model is interpreted literally. The model offers a theory of
individual ownership of assets, that is, how control over assets should be distributed
among individuals, but it does not explain why firms own assets” (Holmström, 1999).
•
“[I]t is not so clear how one would use this model to understand, for example, the
acquisition by a large multidivisional firm of one of its suppliers. Managers don’t own
their companies’ assets, though they may control their use. How then might we
think about the boundaries of the firm when managers control assets but don’t own
them?” (Bolton and Scharfstein, 1989).
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
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Internal Capital Markets and the Boundaries of the Firm
• Reality check: control over assets resides with headquarters (HQ):
•
… even though HQ itself is not the owner of the assets; it is merely given authority
by the firm’s owners (i.e., shareholders),
•
… even though HQ makes no relationship-specific investments.
•
“The Grossman-Hart Moore framework … predicts that control should be allocated
to parties whose relationship-specific investments are most important to the
relationship. Yet headquarters is given control, even though it does not really make
such investments” (Bolton and Scharfstein, 1989).
• (Realistic) theory of firm boundaries:
•
•
•
•
Centralized decision making under HQ.
HQ, while not owner, has effective control over firm, including assets.
Can control divisions’ investment, giving more funds to some and less to others.
External lender, such as a bank, cannot prevent firm from going to another bank; nor
can it redistribute funds across borrowers.
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
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Internal Capital Markets and the Boundaries of the Firm
• “Capital-allocation-centric” view on question of firm boundaries
(Alchian, 1969; Williamson, 1975; Stein, 1997):
•
“Loosely speaking, a collection of assets should optimally reside under the roof of a
single firm to the extent that the firm’s internal capital market can do a more efficient
job of allocating capital to these assets than would the external capital market, if the
assets were located in distinct firms” (Stein, 2003).
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
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Internal Capital Markets and the Boundaries of the Firm
• Why might HQ do a better (or worse) job of allocating capital to projects
than external capital market?
•
HQ authority ⇒ can simply dictate efficient reallocation, while bank cannot.
•
HQ authority ⇒ stronger monitoring incentives (Alchian, 1969; Williamson, 1975;
Gertner, Stein, and Scharfstein, 1994; Stein, 1997).
•
HQ authority ⇒ threat of resources being taken away weakens managerial ex-ante
incentives (Aghion and Tirole, 1997; Brusco and Panunzi, 2000).
•
HQ authority ⇒ vulnerable to lobbying & rent-seeking ⇒ may distort efficient
allocation (Milgrom, 1988; Meyer, Milgrom, and Roberts, 1992; Scharfstein and Stein,
2000; Rajan, Servaes, and Zingales, 2000).
• Additional benefit of integration:
•
Coinsurance across imperfectly correlated projects improves debt capacity and
relaxes financing constraints (Lewellen, 1971; Stein, 1997; Inderst and Mueller, 2003).
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
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Summary Part I
• Benefits of Integration:
•
“Smarter-money” effect: i) HQ has incentives to become well informed about
prospects of individual projects; ii) HQ uses this high-quality information to make
value-enhancing reallocations across projects (“winner-picking”).
•
“More-money” effect: more external financing than could be raised by projects
operating as stand-alone entities. Beneficial if there is underinvestment.
• Costs of integration:
•
Less efficient capital allocation: i) powerful but ill-informed HQ; ii) authority to
reallocate resources makes HQ vulnerable to rent-seeking ⇒ may favor weaker
projects (“socialism”).
•
Weaker managerial incentives.
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
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Part II:
Empirical Evidence
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
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Empirical Evidence
• Diversification (or conglomerate) discount.
•
Conglomerate firms trade at discount relative to portfolio of comparable stand-alone firms
(Lang and Stulz, 1994; Berger and Ofek, 1995; Servaes, 1996; Lins and Servaes, 1999).
•
Explanation: poor capital allocation due to agency problems within firms?
• Methodology.
•
Diversification discount: difference between conglomerate firm’s Tobin’s q and weighted q
of portfolio of “comparable” firms.
•
Conglomerate’s Tobin’s q: market value of firm divided by replacement value of firm’s
assets. Alternatively: divide by book value of debt and equity (“market-to-book”).
•
“Comparable” Tobin’s q: for each conglomerate segment, compute mean Tobin’s q of
single-segment firms operating in same 3-digit SIC code. Then take weighted average of
these (imputed) segment qs.
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
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Empirical Evidence
• Data issues (Compustat segment data).
•
Firms self-report segment data and changes in number of segments may reflect changes
in reporting practice, not changes in diversification. Hyland (1997): 25% of cases.
•
Segments may span several industries. In 80% of cases, segment SIC code assigned by
Compustat is not SIC code of segment’s largest industry (Villalonga, 2004).
•
Using Census (BITS) data—which provides correct SIC code of establishments—
Villalonga (2004) finds that conglomerate discount turns into a premium!
• Endogeneity of decision to become a conglomerate.
•
Do conglomerates destroy value or are those firms that choose to form a conglomerate
simply worse firms?
•
Campa and Kedia (2002), Graham, Lemmon, and Wolf (2002), Villalonga (2004):
“correcting” for endogeneity of decision to form a conglomerate makes discount
disappear or even turn into premium!
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
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Empirical Evidence
• Investment within conglomerate firms.
•
Scharfstein (1998), Shin and Stulz (1998), Rajan, Servaes, and Zingales (2000):
conglomerate firms overinvest (relative to stand-alone firms) in segments with low
investment opportunities and underinvest in segments with good investment
opportunities ⇒ inefficient cross-subsidization (“corporate socialism”).
•
Chevalier (2000), Whited (2001): endogeneity of diversification decision. Conglomerate
segments may not have same investment opportunities as stand-alone firms.
– Chevalier (2000): conglomerate divisions exhibit same investment behavior already in the
years before they merge!
– Whited (2001): no difference between investment behavior of conglomerates and stand-alone
firms after correcting for measurement error.
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
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Empirical Evidence
• Sharper tests? Response to investment opportunity shocks.
• “Efficient ICM hypothesis:”
•
“Thus, for example, if a company owns two unrelated divisions A and B, and the appeal
of investing in B suddenly increases, the argument would seem to imply that investment
in A would decline—even if it is positive NPV at the margin—as corporate headquarters
channels relatively more of its scarce resources toward B” (Stein, 1997).
•
Similarly, Shin and Stulz (1998) define an internal capital market to be efficient if “its
allocation of funds to a segment falls when other segments have better investment
opportunities.”
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
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Empirical Evidence
• Lamont (1997): oil price shock of 1986. When oil prices decline (by 50%),
integrated oil companies cut investment across the board, including
investment in non-oil segments.
•
•
26 oil companies.
No shock to investment opportunities. Rather shock to liquidity.
• Khanna and Tice (2001): Wal-Mart’s entry into local markets between
1975 and 1996. Conditional on staying in market, investment by discount
divisions of diversified firms becomes more sensitive to division
profitability than investment by stand-alone discount retailers. Also,
diversified firms transfer funds away from failing discount divisions.
•
25 discount divisions of diversified firms & 24 stand-alone discount retailers.
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
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Empirical Evidence
• Shin and Stulz (1998): segment investment does not depend on
investment opportunities (qs) of other segments ⇒ inefficient internal
capital markets.
•
•
•
Industry qs used to measure segments’ investment opportunities.
Compustat segment data.
No “shock” to investment opportunities. Simple cross-sectional variation in segments’
industry qs.
• Maksimovic and Phillips (2002): segment’s growth varies positively
(negatively) with other segments’ productivity if segment’s change in
sales at industry level is lower (higher) than that of firm’s median
segment ⇒ efficient internal capital markets.
•
•
Census data, albeit aggregated at firm-industry (“segment”) level.
No “shock” to investment opportunities. Simple cross-sectional variation in segments’
industry sales.
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
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Summary Part II
• Inconclusive Evidence.
•
•
Diversification discount or premium?
Efficient or inefficient internal capital markets?
• Data/sample issues:
•
•
Compustat segment data.
Small-sample industry studies.
• “Shock” to investment opportunities?
•
Only Khanna and Tice (2001) (small-sample industry study).
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
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Part III:
“Capital and Labor
Reallocation within Firms”
(Giroud and Mueller, JF, 2015)
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
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Capital and Labor Reallocation within Firms
• U.S. Census Bureau plant-level data.
• Large sample (almost 300,000 plant-year observations).
• Plausibly exogenous shock to plant-level investment opportunities.
• Relatively tight identification (e.g., plant FE, MSA x year FE).
• How does (positive) shock to investment opportunities at one plant of a
firm affect investment and employment at other plants within same firm?
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
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Capital and Labor Reallocation within Firms
• “Efficient ICM hypothesis:”
•
“Thus, for example, if a company owns two unrelated divisions A and B, and the appeal
of investing in B suddenly increases, the argument would seem to imply that
investment in A would decline—even if it is positive NPV at the margin—as corporate
headquarters channels relatively more of its scarce resources toward B” (Stein, 1997).
• This paper: “natural experiment” that is close in spirit to thought
experiment in Stein’s quote.
•
•
•
Suppose appeal of investing in a plant suddenly increases. Does investment (and
employment) in other plants within same firm decline?
“Sudden increase in appeal of investing in plant:” introduction of new airline route that
reduces travel time between HQ and plant.
Reduction in travel time makes it easier for HQ to monitor plant, acquire information,
give advice, etc. ⇒ raises marginal productivity of capital and labor ⇒ makes investing in
plant more appealing.
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
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Capital and Labor Reallocation within Firms
• Giroud (2013, QJE): new airline route between HQ and plant leads to
increase in plant-level productivity and investment, consistent with
notion that investment in plant has suddenly become more appealing.
• This paper: use increase in plant-level investment as starting point and
ask whether it leads to a reallocation of resources within the firm.
•
•
•
•
Does investment at other plants within same firm decline?
Which other plants are primarily affected?
Does reallocation depend on whether firm is financially constrained?
Does firm as a whole benefit from reallocation (as predicted by efficient ICM
hypothesis)?
• Endogeneity of new airline routes.
•
Omitted local shocks could lead to both increase in plant-level investment and
introduction of new airline routes. Treatment defined by two locations: location of
plant’s and HQ’s home airports ⇒ can control for local shocks.
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
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Capital and Labor Reallocation within Firms
Financially Unconstrained Firms
Financially Constrained Firms
Δ Investment = 0
Δ Employment = 0
Δ Investment < 0
Δ Employment < 0
OP1
OP2
OP1
HQ
HQ
TP
TP
Δ Investment > 0
Δ Employment > 0
Δ Investment > 0
Δ Employment > 0
Firm level:
Δ Σ Investment > 0
Δ Σ Employment > 0
Δ Σ Productivity > 0
Mueller Keynote St. Gallen
Firm level:
OP2
Δ Σ Investment = 0
Δ Σ Employment = 0
Δ Σ Productivity > 0
Capital and Labor Reallocation within Firms
23
Capital and Labor Reallocation within Firms
• Treatment:
•
Introduction of new airline route that reduces travel time between HQ and plant ⇒
increases appeal of investing in treated plant.
• “Other” plants:
•
Belong to same firm as treated plant.
• Difference-in-differences methodology:
•
•
Before versus after introduction of new airline route.
Treated/“Other” plants versus control plants.
• Control group:
•
Plants that have not (yet) been treated or have not (yet) been “other” plants. Staggered
introduction of new airline routes ⇒ plants remain in control group until they become
either treated or “other” plant.
• Financing Constraints:
•
FC dummy equals one if plant belongs to firm that is financially constrained in year prior to
treatment.
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
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Capital and Labor Reallocation within Firms
1985 (Before)
1986 (After)
ORD
MEM
BOS
BOS
JFK
JFK
ORD
MEM
ATL
Mueller Keynote St. Gallen
ATL
Capital and Labor Reallocation within Firms
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Capital and Labor Reallocation within Firms
1985 (Before)
1986 (After)
BOS
ORD
ORD
MEM
MEM
Mueller Keynote St. Gallen
BOS
ORD
ORD
JFK
JFK
ATL
MEM
MEM
Capital and Labor Reallocation within Firms
JFK
JFK
ATL
26
Capital and Labor Reallocation within Firms
• Plant-level data:
•
Census of Manufactures (CMF), Annual Survey of Manufactures (ASM), Longitudinal
Business Database (LBD): all plants with at least 250 employees; smaller plants
randomly sampled.
• Firm-level data:
•
•
Compustat. Link to Census plant-level data via Compustat-SSEL bridge.
Airline data:
•
T-100 Domestic Segment Database, ER-586 Service Segment Data. All flights that have
taken place between any two airports in U.S.
• Sample period:
•
1977 – 2005.
• Selection criteria:
•
•
Firms covered in Compustat. “Pure” manufacturing firms: plants in ASM/CMF account
for at least 90% of firm’s employees.
Final sample of 291,358 plant-year observations.
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
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Capital and Labor Reallocation within Firms
Dependent Variable:
Investment
[1]
Treated
Other
[2]
[3]
[4]
KZ-Index
WW-Index
[5]
[6]
0.019***
(0.006)
0.028***
(0.005)
-0.006*
(0.004)
0.001
(0.004)
0.019**
(0.008)
0.026***
(0.004)
-0.007
(0.006)
-0.000
(0.003)
0.025***
(0.004)
-0.002
(0.003)
0.008***
(0.003)
0.011***
(0.001)
-0.003
(0.002)
-0.000
(0.001)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
291,358
0.32
291,358
0.32
291,358
0.32
291,358
0.92
291,358
0.92
291,358
0.92
Other × FC
Other × Non-FC
Mueller Keynote St. Gallen
WW-Index
0.008***
(0.002)
0.012***
(0.002)
-0.002*
(0.001)
0.000
(0.001)
Treated × Non-FC
Observations
R-squared
KZ-Index
0.010***
(0.001)
-0.001
(0.001)
Treated × FC
Control Variables
Plant Fixed Effects
Year Fixed Effects
MSA × Year Fixed Effects
Employment
Capital and Labor Reallocation within Firms
28
Capital and Labor Reallocation within Firms
• Coefficient on “Treated x FC” implies an increase in capital expenditures at
treated plant equal to 0.8% of capital stock.
• For FC firms, increase at treated plant is roughly of same magnitude as
decline at other plants:
•
•
•
Investment increases by $186,000 at treated plant, while it declines by $179,000 at all
other plants combined.
Employment increases by 5 employees at treated plant, while it declines by 6 employees
at all other plants combined.
Investment and employment move in same direction.
•
•
Capital and labor are complements in firm’s production function.
Can examine issue more directly by using capital-to-labor ratio as dependent variable.
Remains unchanged throughout (at firm level, at treated plant, at other plants).
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
29
Capital and Labor Reallocation within Firms
•
Average spillover effect is weak and (at best) marginally significant:
Dependent Variable:
Investment
[1]
Treated
Other
Treated × FC
Treated × Non-FC
Other × FC
Other × Non-FC
Employment
KZ-Index
WW-Index
[2]
[3]
0.010***
(0.001)
-0.001
(0.001)
[4]
KZ-Index
WW-Index
[5]
[6]
0.019***
(0.006)
0.028***
(0.005)
-0.006*
(0.004)
0.001
(0.004)
0.019**
(0.008)
0.026***
(0.004)
-0.007
(0.006)
-0.000
(0.003)
0.025***
(0.004)
-0.002
(0.003)
0.008***
(0.002)
0.012***
(0.002)
-0.002*
(0.001)
0.000
(0.001)
0.008***
(0.003)
0.011***
(0.001)
-0.003
(0.002)
-0.000
(0.001)
•
Amount of resources needed to “feed” treated plant—and thus amount that must be taken
away from other plants—is relatively modest.
•
Amount is divided among many other plants, meaning average amount taken away from any
individual plant is small.
•
Spillover effect should become stronger if we focus on firms with relatively few other plants.
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
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Capital and Labor Reallocation within Firms
Dependent Variable:
Investment
Treated × FC
Treated × Non-FC
Other × FC × (# Other Plants < Median)
Other × FC × (# Other Plants ≥ Median)
Other × Non-FC × (# Other Plants < Median)
Other × Non-FC × (# Other Plants ≥ Median)
Control Variables
Plant Fixed Effects
Year Fixed Effects
MSA × Year Fixed Effects
Observations
R-squared
Mueller Keynote St. Gallen
Employment
KZ-Index
WW-Index
KZ-Index
WW-Index
[1]
[2]
[3]
[4]
0.008***
(0.002)
0.012***
(0.002)
-0.004**
(0.002)
-0.001
(0.002)
0.000
(0.002)
0.001
(0.002)
0.008***
(0.003)
0.011***
(0.001)
-0.005**
(0.003)
-0.002
(0.004)
-0.001
(0.002)
0.000
(0.001)
0.019***
(0.006)
0.028***
(0.005)
-0.011**
(0.006)
-0.003
(0.006)
0.001
(0.006)
-0.000
(0.004)
0.019**
(0.008)
0.026***
(0.004)
-0.014**
(0.007)
-0.002
(0.010)
0.001
(0.005)
-0.001
(0.004)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
291,358
0.32
291,358
0.32
291,358
0.92
291,358
0.92
Capital and Labor Reallocation within Firms
31
Capital and Labor Reallocation within Firms
• Another reason for weak significance is that average spillover effect is
estimated with much noise.
• HQ may not uniformly “tax” all of firm’s other plants in same way: while
some plants may experience large drop in resources, others may
experience none.
• Examine which other plants are primarily affected by resource reallocation.
Spillover effects should become stronger if we focus on these plants.
•
•
•
•
•
Plant productivity (yes).
Peripheral vs. main industries (yes).
Same vs. different industries (no).
Acquired vs. own plants (no).
Proximity to HQ (yes).
Mueller Keynote St. Gallen
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Capital and Labor Reallocation within Firms
• Aggregate effect at firm level?
• For FC firms, plant-level results suggest that increase in investment and
employment at treated plant is of same magnitude as decrease at other
plants ⇒ aggregate (or net) effect at firm level should be roughly zero.
• For Non-FC firms, no offsetting effect at other plants ⇒ aggregate (or net)
effect at firm level should be positive.
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
33
Capital and Labor Reallocation within Firms
Dependent Variable:
Investment
[1]
Treatment
WW-Index
[2]
[3]
[4]
KZ-Index
WW-Index
[5]
[6]
-0.000
(0.002)
0.009***
(0.002)
0.001
(0.003)
0.006***
(0.002)
0.004**
(0.002)
0.000
(0.001)
0.004***
(0.001)
0.000
(0.001)
0.003***
(0.001)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
33,695
0.41
33,695
0.41
33,695
0.41
33,695
0.88
33,695
0.88
33,695
0.88
Treatment × Non-FC
Observations
R-squared
KZ-Index
0.002***
(0.001)
Treatment × FC
Control Variables
Firm Fixed Effects
Year Fixed Effects
Employment
Firm-Level Regressions: Investment & Employment
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
34
Capital and Labor Reallocation within Firms
•
“Efficient ICM hypothesis:”
•
•
While resources may be taken away from projects that are positive NPV at the margin,
they are channeled toward other projects whose investment prospects are even better.
Alternative hypothesis: resource reallocation is inefficient, e.g., outcome
of lobbying by managers of treated plant who suddenly find it easier to
lobby for larger budget given that travel time to HQ is reduced.
•
•
Could explain why treated plant gains at expense of other plants (if firm is financially
constrained).
Examine effect on aggregate firm-level productivity (TFP) and profitability (ROC, OM).
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
35
Capital and Labor Reallocation within Firms
Dependent Variable:
TFP
ROC
KZ-Index WW-Index
[1]
Treatment
KZ-Index WW-Index
[4]
[5]
[6]
0.004***
(0.001)
0.002**
(0.001)
0.005***
(0.001)
0.002**
(0.001)
0.004***
(0.001)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
33,695
0.51
33,695
0.51
33,695
0.51
Treatment × Non-FC
Observations
R-squared
[3]
0.003***
(0.001)
Treatment × FC
Control Variables
Firm Fixed Effects
Year Fixed Effects
[2]
OM
KZ-Index WW-Index
[7]
[8]
[9]
0.002**
(0.001)
0.004***
(0.001)
0.002*
(0.001)
0.004***
(0.001)
0.003***
(0.001)
0.003**
(0.001)
0.006***
(0.001)
0.003**
(0.001)
0.005***
(0.001)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
33,695
0.61
33,695
0.61
33,695
0.61
33,695
0.65
33,695
0.65
33,695
0.65
Firm-Level Regressions: Productivity & Profitability
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
36
Capital and Labor Reallocation within Firms
• Other sources of funding?
• Plant-level results suggest that FC firms fund expansion at treated plant
entirely by reallocating internal resources ⇒ would not expect to see
increases in other sources of funding.
• Non-FC firms do not reallocate internal resources ⇒ would expect to see
increases in other sources of funding.
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
37
Capital and Labor Reallocation within Firms
Dependent Variable:
Cash
FC Index:
KZ-Index WW-Index
[1]
Treated
[3]
Short-Term Debt
KZ-Index WW-Index
[4]
[5]
[6]
-0.000
(0.003)
0.000
(0.001)
-0.002*
(0.001)
-0.000
(0.002)
-0.002
(0.001)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
33,695
0.30
33,695
0.30
33,695
0.30
Treated × Non-FC
Observations
R-squared
[2]
-0.001
(0.001)
Treated × FC
Control Variables
Firm Fixed Effects
Year Fixed Effects
Equity
Long-Term Debt
KZ-Index WW-Index
[7]
[8]
[9]
0.001
(0.001)
0.000
(0.004)
-0.001
(0.003)
-0.000
(0.004)
-0.000
(0.003)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
33,695
0.28
33,695
0.28
33,695
0.28
KZ-Index WW-Index
[10]
[11]
[12]
-0.000
(0.003)
0.001
(0.003)
-0.000
(0.003)
0.000
(0.002)
0.000
(0.002)
0.000
(0.002)
0.002
(0.001)
-0.000
(0.002)
0.002*
(0.001)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
33,695
0.10
33,695
0.10
33,695
0.10
33,695
0.14
33,695
0.14
33,695
0.14
Firm-Level Regressions: Other Sources of Funding
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
38
Summary Part III
• Resource reallocation within financially constrained firms:
•
•
Positive shock to investment opportunities ⇒ increase in investment and employment
at treated plant and decline in investment and employment (of same magnitude) at
other plants.
Firm-wide productivity and profitability increase ⇒ consistent with “efficient ICM
hypothesis.”
• Potential “dark side” of internal labor markets.
•
•
•
Unless workers are transferred across plants—which is less likely if plants are located
far away from one another—results imply that treated plant hires new workers, while
“other” plants are forced to lay off workers.
Some workers are laid off not because their plant is doing poorly but merely because
some other plant within same firm is doing relatively better.
Layoff risk due to HQ engaging in “winner-picking” may explain why conglomerates pay
higher wages on average (e.g., Schoar, 2002).
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
39
Part IV:
What Next?
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
40
What Next?
• Do ICM create value?
• Giroud & Mueller (2015): ICM actively reallocate scarce resources,
beneficial for firm as a whole (see also Khanna and Tice, 2001;
Maksimovic and Phillips, 2002).
• How does this compare to external resource reallocation? “Capitalallocation-centric” view of firm boundaries: do ICM do a better job than
external capital (and labor) markets? And if so, under what
circumstances and why?
•
Main challenge: endogeneity of decision to join or form conglomerate/multi-unit firm.
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
41
What Next?
• How should we think of “capital and labor reallocation” within a firm?
• Presumably, what gets reallocated are primarily budgets. These, in turn,
determine the level of investment and employment at the division (or
establishment or project) level.
• However, casual and empirical evidence suggests that, at least to some
degree, employees are also physically reallocated across firm units.
•
Employer-employee matched data (e.g., LEHD). See, e.g., Tate and Yang (2015).
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
42
What Next?
• ICM and Macroeconomics.
• If “shocks” are transmitted through ICM across industries or regions, what
are the aggregate implications?
•
•
Do ICM dampen or amplify business cycle shocks?
If geographic regions (e.g., counties, states) are connected through firms’ ICM, does this
result in stronger co-movements of regional business cycles?
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
43
Thank You!
Mueller Keynote St. Gallen
Capital and Labor Reallocation within Firms
44