Abstract

This paper studies non-financial conglomerates that have a dedicated financial division, which we hypothesize improves the operation of internal capital markets. We develop a simple model based on this idea, which predicts that financial divisions are more valuable for larger firms, for firms with more diverse segments, and also for firms with more segments. Consistent with these predictions, we empirically find that it is conglomerates with the aforementioned characteristics that tend to possess a dedicated financial division. Moreover, we show empirical evidence that supports the notion that conglomerates with financial divisions run more efficient internal capital markets. Finally, we document that conglomerates with a financial division appear to command a value premium when compared to otherwise similar firms.