Download this Paper Open PDF in Browser

Does Diversification Create Value in the Presence of External Financing Constraints? Evidence from the 2007–2009 Financial Crisis

58 Pages Posted: 17 Mar 2010 Last revised: 2 Dec 2010

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: November 29, 2010

Abstract

We show that the value of corporate diversification increased during the 2007–2009 financial crisis. Diversification gave firms both financing and investment advantages. First, conglomerates became significantly more leveraged relative to comparable focused firms. Second, conglomerates’ access to internal capital markets became more valuable not just because external capital markets became more costly, but also because the efficiency of internal capital allocation increased significantly during the crisis. Our analysis provides new evidence on how the diversification discount and its drivers vary with financial constraints and economic conditions, and suggests that corporate diversification can serve an important insurance function for investors.

Keywords: Crisis, Diversification, Discount, Conglomerates, Internal capital markets

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 2007–2009 Financial Crisis (November 29, 2010). Harvard Business School Finance Working Paper No. 10-101. Available at SSRN: https://ssrn.com/abstract=1571255

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
New York, NY NY 10012
United States

Paper statistics

Downloads
888
Rank
9,322
Abstract Views
3,063