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Conglomerate entrenchment under optimal financial contracting

Faure-Grimaud, Antoine and Inderst, Roman (2004) Conglomerate entrenchment under optimal financial contracting. Discussion paper (521). Financial Markets Group, London School of Economics and Political Science, London, UK.

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We provide a formal analysis of the notion that conglomerates are more ‘entrenched’ as they have ‘deeper pockets’. Using the financial contracting model of Bolton and Scharfstein (1990), we can isolate two effects that confirm this conjecture: the pooling of cash flows, which allows to smooth out repayments, and the ability to obtain better credit terms. For less profitable business segments, the internal capital market operated in a conglomerate may, however, work in the opposite direction, increasing the sensitivity of operations to own cash flows and increasing the likelihood of exit.

Item Type: Monograph (Discussion Paper)
Official URL:
Additional Information: © 2004 The Authors
Divisions: Financial Markets Group
Subjects: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
Date Deposited: 06 Aug 2009 16:14
Last Modified: 25 Jan 2021 00:53

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