Abstract

http://ssrn.com/abstract=1364481
 
 

References (10)



 
 

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Corporate Diversification and the Cost of Capital


Rebecca N. Hann


University of Maryland

Maria Ogneva


University of Southern California - Marshall School of Business

Oguzhan Ozbas


University 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

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Date posted: March 21, 2009 ; Last revised: October 25, 2012

Suggested Citation

Hann, Rebecca N. and Ogneva, Maria and Ozbas, Oguzhan, Corporate Diversification and the Cost of Capital (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. Available at SSRN: http://ssrn.com/abstract=1364481 or http://dx.doi.org/10.2139/ssrn.1364481

Contact Information

Rebecca N. Hann
University of Maryland ( email )
Robert H. Smith School of Business
College Park, MD 20742
United States
Maria Ogneva
University of Southern California - Marshall School of Business ( email )
701 Exposition Blvd
Los Angeles, CA 90089
United States
Oguzhan Ozbas (Contact Author)
University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )
Marshall School of Business
Los Angeles, CA 90089
United States
213-740-0781 (Phone)
213-740-6650 (Fax)
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