Does Diversification Create Value in the Presence of External Financing Constraints? Evidence from the 2008–2009 Financial Crisis

59 Pages Posted: 15 Mar 2010

See all articles by Venkat Kuppuswamy

Venkat Kuppuswamy

Harvard University - Technology & Operations Management Unit

Belen Villalonga

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

Multiple version iconThere are 2 versions of this paper

Date Written: March 8, 2010

Abstract

We examine whether and why the value of diversification changed during the 2008–2009 financial crisis. We find that diversified firms increased in value relative to single-segment firms during the crisis, a result that is not driven by the endogeneity of either financing constraints or firms’ diversification choices. We also find that the increase did not simply reflect changes in investor perceptions but real differences in corporate finance and investment, through two different channels: a “more money” effect arising from the debt coinsurance feature of conglomerates, and a “smarter money” effect arising from more efficient internal capital allocation.

Keywords: Crisis, Diversification, discount, conglomerates, internal capital markets, coinsurance

JEL Classification: G31, G32, G34

Suggested Citation

Kuppuswamy, Venkat and Villalonga, Belen, Does Diversification Create Value in the Presence of External Financing Constraints? Evidence from the 2008–2009 Financial Crisis (March 8, 2010). Harvard Business School Finance Working Paper No. 1569546, Available at SSRN: https://ssrn.com/abstract=1569546 or http://dx.doi.org/10.2139/ssrn.1569546

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
Suite 9-160
New York, NY NY 10012
United States

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