Does Diversification Create Value in the Presence of External Financing Constraints? Evidence from the 2007–2009 Financial Crisis
58 Pages Posted: 17 Mar 2010 Last revised: 2 Dec 2010
Date Written: November 29, 2010
We show that the value of corporate diversification increased during the 2007–2009 financial crisis. Diversification gave firms both financing and investment advantages. First, conglomerates became significantly more leveraged relative to comparable focused firms. Second, conglomerates’ access to internal capital markets became more valuable not just because external capital markets became more costly, but also because the efficiency of internal capital allocation increased significantly during the crisis. Our analysis provides new evidence on how the diversification discount and its drivers vary with financial constraints and economic conditions, and suggests that corporate diversification can serve an important insurance function for investors.
Keywords: Crisis, Diversification, Discount, Conglomerates, Internal capital markets
JEL Classification: G31, G32, G34
Suggested Citation: Suggested Citation