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Corporate Diversification and the Cost of CapitalRebecca N. HannUniversity of Maryland Maria OgnevaUniversity of Southern California - Marshall School of Business Oguzhan OzbasUniversity of Southern California - Marshall School of Business - Finance and Business Economics Department October 24, 2012 Journal of Finance, Forthcoming Marshall School of Business Working Paper No. FBE 32-09 Rock Center for Corporate Governance at Stanford University Working Paper No. 58 AFA 2011 Denver Meetings Paper Abstract: We examine whether organizational form matters for a firm's cost of capital. Contrary to conventional view, we argue that coinsurance among a firm's business units can reduce systematic risk through the avoidance of countercyclical deadweight costs. We find that diversified firms have on average a lower cost of capital than comparable portfolios of standalone firms. In addition, diversified firms with less correlated segment cash flows have a lower cost of capital, consistent with a coinsurance effect. Holding cash flows constant, our estimates imply an average value gain of approximately 5% when moving from the highest to the lowest cash flow correlation quintile.
Number of Pages in PDF File: 88 Keywords: Corporate diversification, Coinsurance, Cost of capital Accepted Paper SeriesDate posted: March 21, 2009 ; Last revised: October 25, 2012Suggested CitationContact Information
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