Value of Conglomerates and Capital Market Conditions

44 Pages Posted: 15 Mar 2006

See all articles by An Yan

An Yan

Fordham University - Gabelli School of Business

Date Written: February 2006


This paper studies the variation in the value of diversification across time under various capital market conditions. We find that the value of conglomerates increases relative to focused firms when external capital is more costly at the aggregate level. We also find that such an increase is more profound for financially-constrained conglomerates, such as bank-dependent conglomerates or small conglomerates. Thus, our results support the existing theoretical literature on the advantage of diversification over focus, i.e., the ability of conglomerates to substitute costly external capital markets with internal capital markets. In particular, our findings suggest that the availability of internal capital market creates value when the financing cost in external capital markets is high, especially for those financially-constrained conglomerates.

Keywords: Diversification, Internal Capital Market, Financial Constraint,

JEL Classification: G32, G34

Suggested Citation

Yan, An, Value of Conglomerates and Capital Market Conditions (February 2006). Available at SSRN: or

An Yan (Contact Author)

Fordham University - Gabelli School of Business ( email )

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