Financial Market Frictions and Diversification

87 Pages Posted: 24 Oct 2016 Last revised: 31 May 2017

See all articles by Gregor Matvos

Gregor Matvos

University of Texas at Austin - Department of Finance

Amit Seru

Stanford University

Rui Silva

London Business School - Department of Finance

Date Written: September 1, 2016


We find new facts that relate the evolution of firm scope to the changing frictions in external capital markets over the last three decades. We find that large, diversified publicly traded firms increase their scope during times of high external capital market frictions, such as in the recent Great Recession. Moreover, during these times firms diversify their investment needs and cash flow across industries. We also find similar phenomena outside diversified public firms. Examining the mergers and acquisitions activity of stand-alone and diversified private firms, we uncover similar patterns. In aggregate data, we find that the composition of mergers shifts from focused to diversifying and back with changes in external market conditions. Our evidence is broadly consistent with the notion that firms diversify their scope in response to tightening in external capital markets.

Keywords: Theory of Firm, Firm Boundaries, Conglomerates, Diversification, Internal Capital Markets

JEL Classification: D92, E22, G01, G3, L21, L25

Suggested Citation

Matvos, Gregor and Seru, Amit and Silva, Rui, Financial Market Frictions and Diversification (September 1, 2016). Chicago Booth Research Paper No. 17-13. Available at SSRN: or

Gregor Matvos (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

Amit Seru

Stanford University ( email )

Stanford, CA 94305
United States

Rui Silva

London Business School - Department of Finance ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

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