Publications
Publications
- 2010
- HBS Working Paper Series
Does Diversification Create Value in the Presence of External Financing Constraints? Evidence from the 2007-2009 Financial Crisis
Abstract
We show that the value of corporate diversification increased during the 2007-2009 financial crisis. Diversification gave firms both financing and investment advantages. First, conglomerates became significantly more leveraged relative to comparable focused firms. Second, conglomerates' access to internal capital markets became more valuable not just because external capital markets became more costly, but also because the efficiency of internal capital allocation increased significantly during the crisis. Our analysis provides new evidence on how the diversification discount and its drivers vary with financial constraints and economic conditions and suggests that corporate diversification can serve an important insurance function for investors.
Keywords
Diversification; Financial Crisis; Resource Allocation; Investment; Financing and Loans; Business Conglomerates; Capital Markets
Citation
Kuppuswamy, Venkat, and Belen Villalonga. "Does Diversification Create Value in the Presence of External Financing Constraints? Evidence from the 2007-2009 Financial Crisis." Harvard Business School Working Paper, No. 10-101, May 2010. (Revised November 2010.)