Do Firms Proactively Build Internal Markets for Redeployment? Evidence from a Natural Experiment

The topic of related diversification is of fundamental interest to corporate strategy research. However, the understanding of how the potential for resource redeployment might encourage related diversification is limited. This paper explores the impact of the 2006 German real estate transfer tax (RETT) reform, which led to higher RETT rates but retained the exemption from RETT for corporate restructurings. We propose that firms might have reacted strategically to the threat of higher transfer taxes by combining related businesses into a portfolio, providing an efficient internal market for reallocating property assets in the event of business-specific shocks. Consistent with a dynamic perspective on relatedness, difference-in-differences analyses of the European retail market show that the probability of related diversification increased significantly for firms that were affected by the reform, relative to control firms. This finding contributes to the literature that links firm boundary choices to intertemporal economies of scope and offers new insights into the real effects of transfer tax policies. This paper was accepted by Alfonso Gambardella, business strategy. Funding: This work was supported by the Ministerio de Ciencia, Innovación y Universidades [Grant PID2020-115660GB-I00]. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2021.02396 .