Does Corporate Diversification Provide Insurance Against Economic Disruptions?
Posted: 25 Nov 2019
Date Written: July 15, 2019
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
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