Cash Holdings and Corporate Diversification
University of Washington - Michael G. Foster School of Business
September 6, 2008
Journal of Finance, Forthcoming
This paper studies the relation between corporate liquidity and diversification. The key finding is that multi-division firms hold significantly less cash than standalone firms because they are diversified in their investment opportunities. Lower cross-divisional correlations in investment opportunity and higher correlations between investment opportunity and cash flow correspond to lower cash holdings, even after controlling for cash-flow volatility. The effects are strongest in financially constrained firms and in well-governed firms, and correspond to efficient fund transfers from low- to high-productivity divisions. Taken together, these results bring forth an efficient link between diversification in investment opportunity and corporate liquidity.
Number of Pages in PDF File: 70Accepted Paper Series
Date posted: September 6, 2008 ; Last revised: October 26, 2009
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