Does Diversification Create Value in the Presence of External Financing Constraints? Evidence from the 2007–2009 Financial Crisis
Harvard University - Technology & Operations Management Unit
New York University (NYU) - Leonard N. Stern School of Business
November 29, 2010
Harvard Business School Finance Working Paper No. 10-101
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.
Number of Pages in PDF File: 58
Keywords: Crisis, Diversification, Discount, Conglomerates, Internal capital markets
JEL Classification: G31, G32, G34
Date posted: March 17, 2010 ; Last revised: December 2, 2010
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