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Does Diversification Create Value in the Presence of External Financing Constraints? Evidence from the 2007–2009 Financial Crisis

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  • Venkat Kuppuswamy

    (Kenan-Flager Business School, University of North Carolina at Chapel Hill, Chapel Hill, North Carolina 27599)

  • Belén Villalonga

    (Stern School of Business, New York University, New York, New York 10003)

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 and why the value of diversification varies with financial constraints and economic conditions, and it suggests that corporate diversification can serve an important insurance function for investors. This paper was accepted by Amit Seru, finance.

Suggested Citation

  • Venkat Kuppuswamy & Belén Villalonga, 2016. "Does Diversification Create Value in the Presence of External Financing Constraints? Evidence from the 2007–2009 Financial Crisis," Management Science, INFORMS, vol. 62(4), pages 905-923, April.
    • Handle: RePEc:inm:ormnsc:v:62:y:2016:i:4:p:905-923
    DOI: 10.1287/mnsc.2015.2165
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