Leverage and Investment in Diversified Firms

36 Pages Posted: 13 Apr 2004

See all articles by Seoungpil Ahn

Seoungpil Ahn

Sogang University

David J. Denis

University of Pittsburgh

Diane K. Denis

University of Pittsburgh - Katz School of Business

Date Written: April 8, 2004

Abstract

Within diversified firms, the negative impact of leverage on investment is significantly greater for high q than for low q segments, and significantly greater for non-core than for core segments. This is consistent with the view that diversified firms allocate a disproportionate share of their debt service burden to their higher q and non-core segments. We also find that among low-growth firms, the positive relation between leverage and firm value is significantly weaker in diversified firms than in focused firms. We conclude that the disciplinary benefits of debt are partially offset by the additional managerial discretion in allocating debt service that is provided by the diversified organizational structure.

Keywords: Leverage, diversification, investment policy

JEL Classification: G31, G32

Suggested Citation

Ahn, Seoungpil and Denis, David J. and Denis, Diane K., Leverage and Investment in Diversified Firms (April 8, 2004). Available at SSRN: https://ssrn.com/abstract=528703 or http://dx.doi.org/10.2139/ssrn.528703

Seoungpil Ahn

Sogang University ( email )

Seoul 121-742
Korea, Republic of (South Korea)

David J. Denis (Contact Author)

University of Pittsburgh ( email )

Katz Graduate School of Business
Pittsburgh, PA 15260
United States
412-648-1708 (Phone)

Diane K. Denis

University of Pittsburgh - Katz School of Business ( email )

368B Mervis Hall
Pittsburgh, PA 15260
United States
412-624-0296 (Phone)

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