This paper develops a novel theory of capital mis-allocation within rms that stems from managers' empire building and informational frictions within the organization. Introducing an internal capital market into a two-factor model of multi-segment rms, we show that competition imposes discipline on managers and reduces cap- ital mis-allocation across divisions, thereby lowering the conglomerate discount. The theory can explain why exporters exhibit a lower conglomerate discount than non-exporters (a new fact we establish). We then exploit the China shock as an exogenous shock to competition to test the model's predictions with data on US companies. Results show that tougher competition signicantly reduces managers' over-reporting of costs and improves the allocation of capital within rms.