We examine capital expenditure decisions of discount firms in response to WalMart's entry into their markets. Before Wal-Mart's entry, focused incumbents and discount divisions of diversified incumbents are similar in size, geographic dispersion, and firm debt levels. However, discount divisions of diversified firms are significantly more productive. After Wal-Mart's entry, diversified firms are quicker to either "exit" the discount business or "stay and fight." Also, their capital expenditures are more sensitive to the productivity of their discount business. Internal capital markets function well, as transfers are away from the worsening discount divisions. It appears diversified firms make better investment decisions.

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We show that entrepreneurs may prefer to allow insider trading even when it is not socially optimal. We examine a model in which an insider/ manager allocates resources on the basis of his private information and outside information conveyed through the secondary-market price of the jirm's shares. If the manager is allowed to trade, he will compete with informed outsiders, reducing the equilibrium quality of outside information. While the benefits to production of outside information are the same for society and entrepreneurs, we show that the social and private costs are digerent. Thus,entrepreneurs and society may disagree on the conditions under which insider trading restrictions should be imposed.

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