Conglomerate Discount and Financial Constraints: A Novel View to an Old Puzzle

48 Pages Posted: 10 Mar 2010

See all articles by Andriy Bodnaruk

Andriy Bodnaruk

University of Illinois at Chicago

Massimo Massa

INSEAD - Finance

Lei Zhang

University of Queensland - Business School

Date Written: March 8, 2010


We study the conglomerate discount from a novel perspective. We argue that the discount – measured in terms of Tobin’s Q – far from being a sign of lower value is, instead, a sign of higher value for the conglomerate. This can be explained as conglomerates being less financially constrained than single segment firms. A financially constrained firm is forced to select only the high return investments and therefore its Q will be high. Given that single segment firms are more likely to be financially constrained than multiple segment ones, they should also display a Tobin’s Q higher than the (less constrained) equivalent division of the conglomerate. Therefore, the conglomerate discount measures not so much the lower “value” of the conglomerate firm as the higher constraints faced by single-segments firms used as benchmark. We empirically test this hypothesis by employing a novel – and purely exogenous – measure of financial constraints that is based on the relative imbalance between bond and bank capital supply in the region in which the firm is located. We focus on the US corporations from 1997 to 2004 and show that firms characterized by higher financial constraints have higher Q as they only select the more profitable investments. We then provide evidence that the lower the degree of financial constraints, the more likely it is that the firm is a conglomerate. Finally, we show a positive correlation between the size of the conglomerate discount and the degree of excess financial constraints of the conglomerate. One-standard deviation increase in the difference of financial constraints between single-segment firms used as a benchmark and the conglomerate raises the conglomerate discount by 3.31% which corresponds to 18.19% of unconditional mean. Our findings suggest a reinterpretation of the standard intuition about conglomerates in which the conglomerate discount gauges the lower degree of financially constraints of the conglomerate.

Keywords: conglomerate discount, financial constraints, Tobin’s Q

JEL Classification: G12, G3, G32

Suggested Citation

Bodnaruk, Andriy and Massa, Massimo and Zhang, Lei, Conglomerate Discount and Financial Constraints: A Novel View to an Old Puzzle (March 8, 2010). Available at SSRN: or

Andriy Bodnaruk

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Lei Zhang (Contact Author)

University of Queensland - Business School ( email )

Brisbane, Queensland 4072

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