Does Corporate Diversification Provide Insurance Against Economic Disruptions?

Posted: 25 Nov 2019

See all articles by Mohammad M. Rahaman

Mohammad M. Rahaman

Saint Mary's University - Sobey School of Business

Simiao Zhou

Shanghai University of Finance and Economics

Varouj Aivazian

affiliation not provided to SSRN

Date Written: July 15, 2019

Abstract

Can the product diversification strategy of a firm provide a natural hedge against adverse economic conditions? We use a quasi-natural experiment to show that diversification attenuates the detrimental impact of unanticipated economic disruptions and enables diversified firms to invest more efficiently than similar focused firms. We find that access to internal capital markets, segment cashflow coinsurance, and greater predictive accuracy are all channels that enhance the resiliency of conglomerates during economic disruptions. Our results suggest that firms’ product diversification is an important conduit for the propagation of systemic shocks.

Keywords: Product diversification, Economic shocks, Investment efficiency, Resource allocation

JEL Classification: G01, G31, L25, M40

Suggested Citation

Rahaman, Mohammad M. and Zhou, Simiao and Aivazian, Varouj, Does Corporate Diversification Provide Insurance Against Economic Disruptions? (July 15, 2019). Journal of Business Research, Vol. 100, 2019. Available at SSRN: https://ssrn.com/abstract=3485996

Mohammad M. Rahaman (Contact Author)

Saint Mary's University - Sobey School of Business ( email )

Halifax, Nova Scotia B3H 3C3
Canada

Simiao Zhou

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

Varouj Aivazian

affiliation not provided to SSRN

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