Cash Holdings and Corporate Diversification
AbstractThis paper studies the relation between corporate liquidity and diversification. The key finding is that multidivision firms hold significantly less cash than stand-alone firms because they are diversified in their investment opportunities. Lower cross-divisional correlations in investment opportunity and higher correlations between investment opportunity and cash flow correspond to lower cash holdings, even after controlling for cash flow volatility. The effects are strongest in financially constrained firms and in well-governed firms, and correspond to efficient fund transfers from low- to high-productivity divisions. Taken together, these results bring forth an efficient link between diversification and corporate liquidity. Copyright (c) 2010 The American Finance Association.
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Bibliographic InfoArticle provided by American Finance Association in its journal The Journal of Finance.
Volume (Year): 65 (2010)
Issue (Month): 3 (06)
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- Kjenstad, Einar & Su, Xunhua, 2012. "Product Market Predatory Threats and the Use of Performance-sensitive Debt," MPRA Paper 44114, University Library of Munich, Germany.
- Takashi Hatakeda, 2012. "R&D Investment Smoothing and Corporate Diversification," Discussion Papers 2012-42, Kobe University, Graduate School of Business Administration.
- Rahaman, Mohammad M. & Zaman, Ashraf Al, 2013. "Management quality and the cost of debt: Does management matter to lenders?," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 854-874.
- Hertzel, Michael G. & Huson, Mark R. & Parrino, Robert, 2012. "Public market staging: The timing of capital infusions in newly public firms," Journal of Financial Economics, Elsevier, vol. 106(1), pages 72-90.
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