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http://ssrn.com/abstract=1571255
 
 

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Does Diversification Create Value in the Presence of External Financing Constraints? Evidence from the 2007–2009 Financial Crisis


Venkat Kuppuswamy


Harvard University - Technology & Operations Management Unit

Belen Villalonga


New York University (NYU) - Leonard N. Stern School of Business

November 29, 2010

Harvard Business School Finance Working Paper No. 10-101

Abstract:     
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

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Date posted: March 17, 2010 ; Last revised: December 2, 2010

Suggested Citation

Kuppuswamy, Venkat and Villalonga, Belen, Does Diversification Create Value in the Presence of External Financing Constraints? Evidence from the 2007–2009 Financial Crisis (November 29, 2010). Harvard Business School Finance Working Paper No. 10-101. Available at SSRN: http://ssrn.com/abstract=1571255

Contact Information

Venkat Kuppuswamy
Harvard University - Technology & Operations Management Unit ( email )
Boston, MA 02163
United States
Belen Villalonga (Contact Author)
New York University (NYU) - Leonard N. Stern School of Business ( email )
40 West 4th Street
New York, NY NY 10012
United States
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