The Hedging Benefits of Industrial and Global Diversification: Evidence from Economic Downturns

30 Pages Posted: 8 Nov 2018

See all articles by Yixin Liu

Yixin Liu

University of New Hampshire

David C. Mauer

University of North Carolina (UNC) at Charlotte

Yilei Zhang

University of North Carolina (UNC) at Charlotte

Date Written: October/November 2018

Abstract

In a large panel of US firms, we find that discounts for industrial and global diversification significantly decrease in economic downturns, suggesting a valuable hedging benefit of diversification. This finding is robust to a wide variety of business cycle and economic uncertainty variables and persists when we account for endogeneity of industrial and global diversification. We further analyze the channels through which diversification is more valuable in economic downturns. We find that the value improvement is largely explained by increases in investment and product market performance relative to focused firms. There is no evidence that improved internal capital market efficiency or access to external finance contribute to the hedging value of diversification.

Keywords: diversification, firm valuation, globalization, hedging

Suggested Citation

Liu, Yixin and Mauer, David C. and Zhang, Yilei, The Hedging Benefits of Industrial and Global Diversification: Evidence from Economic Downturns (October/November 2018). Journal of Business Finance & Accounting, Vol. 45, Issue 9-10, pp. 1322-1351, 2018. Available at SSRN: https://ssrn.com/abstract=3280475 or http://dx.doi.org/10.1111/jbfa.12354

Yixin Liu

University of New Hampshire ( email )

Durham, NH 03824
United States
603-862-3357 (Phone)

David C. Mauer (Contact Author)

University of North Carolina (UNC) at Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States
704-687-7707 (Phone)

Yilei Zhang

University of North Carolina (UNC) at Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States

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