Corporate Diversification and Credit Constraints: Real Effects Across the Business Cycle

Posted: 29 Feb 2008

See all articles by Valentin Dimitrov

Valentin Dimitrov

Rutgers, The State University of New Jersey - Accounting & Information Systems

Sheri Tice

Tulane University - A.B. Freeman School of Business

Abstract

We study whether differences in access to credit cause focused firms to perform differently from diversified firms in the product market. Prior work has identified binding credit constraints for bank-dependent firms during recessions. We assess whether corporate diversification alleviates these constraints. We find that during recessions sales growth rates drop more for bank-dependent focused firms than for rival segments of bank-dependent diversified firms. We also find that during recessions inventory growth rates drop more for bank-dependent focused firms than for bank-dependent diversified firms even after we control for contemporaneous sales growth. Consistent with a credit constraint explanation, we find no difference in the sensitivities to recessions of bank-independent focused and bank-independent diversified firms. (JEL G30, G31, G32)

Suggested Citation

Dimitrov, Valentin and Tice, Sheri, Corporate Diversification and Credit Constraints: Real Effects Across the Business Cycle. The Review of Financial Studies, Vol. 19, Issue 4, pp. 1465-1498, 2006. Available at SSRN: https://ssrn.com/abstract=1097944 or http://dx.doi.org/10.1093/rfs/hhj028

Valentin Dimitrov (Contact Author)

Rutgers, The State University of New Jersey - Accounting & Information Systems ( email )

1 Washington Park
Newark, NJ 07102
United States

Sheri Tice

Tulane University - A.B. Freeman School of Business ( email )

A.B. Freeman School of Business
7 McAlister Drive
New Orleans, LA 70118
United States
504-865-5469 (Phone)
504-865-6751 (Fax)

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