Cash Holdings and Corporate Diversification

70 Pages Posted: 6 Sep 2008 Last revised: 26 Oct 2009

See all articles by Ran Duchin

Ran Duchin

University of Washington - Michael G. Foster School of Business

Date Written: September 6, 2008

Abstract

This paper studies the relation between corporate liquidity and diversification. The key finding is that multi-division firms hold significantly less cash than standalone firms because they are diversified in their investment opportunities. Lower cross-divisional correlations in investment opportunity and higher correlations between investment opportunity and cash flow correspond to lower cash holdings, even after controlling for cash-flow volatility. The effects are strongest in financially constrained firms and in well-governed firms, and correspond to efficient fund transfers from low- to high-productivity divisions. Taken together, these results bring forth an efficient link between diversification in investment opportunity and corporate liquidity.

Suggested Citation

Duchin, Ran, Cash Holdings and Corporate Diversification (September 6, 2008). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1264382

Ran Duchin (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

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