Abstract

http://ssrn.com/abstract=1710562
 
 

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Debt Market Benefits of Corporate Diversification and Segment Disclosures


Francesca Franco


London Business School

Oktay Urcan


University of Illinois at Urbana-Champaign

Florin P. Vasvari


London Business School

January 31, 2013


Abstract:     
We assess the impact of corporate industrial diversification on the cost of public-debt financing and investigate how this relation is affected by the quality of segment disclosures. Using a large sample of U.S. bond issues, we document that the degree of a firm’s industrial diversification is associated with significantly lower bond-offering yields, and that this association is more pronounced for firms with higher segment disclosure quality. These findings suggest that public debt-holders are better able to assess the level of co-insurance provided by a firm’s diversification status when segment disclosures are superior. We further investigate the role of segment disclosures on the pricing of syndicated loans where the size of the bank syndicate decreases access to private information, thus making public segment reporting more relevant. We find that segment disclosure quality has a similar effect on the relation between a firm’s diversification and the syndicated loan spreads when the bank syndicates are large. Overall, our results highlight the importance of segment disclosure quality when assessing the effect of diversification on a firm’s cost of debt financing.

Number of Pages in PDF File: 54

Keywords: Corporate Diversification, Segment Disclosure, Cost of Debt, Co-insurance

JEL Classification: G31, G32, M10, O16

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Date posted: November 18, 2010 ; Last revised: February 20, 2013

Suggested Citation

Franco, Francesca and Urcan, Oktay and Vasvari, Florin P., Debt Market Benefits of Corporate Diversification and Segment Disclosures (January 31, 2013). Available at SSRN: http://ssrn.com/abstract=1710562 or http://dx.doi.org/10.2139/ssrn.1710562

Contact Information

Francesca Franco
London Business School ( email )
Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom
Oktay Urcan (Contact Author)
University of Illinois at Urbana-Champaign ( email )
1206 S. Sixth Street
Champaign, IL 61820
United States
217-265-0383 (Phone)
217-244-0902 (Fax)
Florin P. Vasvari
London Business School ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
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