Uncertainty, Capital Investment, and Corporate Diversification

33 Pages Posted: 10 Apr 2015 Last revised: 13 Nov 2019

Date Written: November 12, 2019

Abstract

This study examines how the effect of uncertainty on capital investment varies between focused firms and conglomerate segments. One advantage of conglomeration is that it gives segments access to the conglomerate's internal capital market, making them less likely to be financially constrained. Consistent with the view that uncertainty exacerbates financial frictions, I find that uncertainty, measured by industry-level stock return volatility, has a negative effect on investment among focused firms but has no statistically significant effect on investment among conglomerate segments. I also show that conglomerate firms transfer resources from low- to high-uncertainty segments. Furthermore, subsample analysis reveals a negative (statistically insignificant) relationship between uncertainty and investment among the conglomerate firms that trade at a discount (premium) relative to focused firms. This study suggests that corporate diversification may improve the efficiency of capital investment decisions under uncertainty.

Keywords: Uncertainty, capital investment, corporate diversification, internal capital market, financial friction

JEL Classification: G30, G32, G39

Suggested Citation

Lee, Sangwon, Uncertainty, Capital Investment, and Corporate Diversification (November 12, 2019). Available at SSRN: https://ssrn.com/abstract=2591750 or http://dx.doi.org/10.2139/ssrn.2591750

Sangwon Lee (Contact Author)

Cornerstone Research

599 Lexington Ave
New York, NY 10022
United States

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