The Hedging Benefits of Industrial and Global Diversification: Evidence from Economic Downturns
30 Pages Posted: 8 Nov 2018
Date Written: October/November 2018
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
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