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Corporate diversification, investment efficiency and the business cycle

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  • Yolanda Yulong Wang

    (SAFTI - Shenzhen Audencia Financial Technology Institute)

Abstract

I document the time-varying investment efficiency of conglomerates compared with singlesegment firms. I find that, during recessions, conglomerates have higher Q-sensitivity of investment than do stand-alone firms, in contrast to the relationship during expansion periods. I also find that conglomerates, with the benefits from internal capital markets, exhibit increased dependence of investment on internal capital during recessionary periods, while stand-alone firms significantly increase cash retention and deviate their investment from its optimal level more severely. I examine the effect of the degree of diversification and find consistent evidence on investment efficiency and deployment of internal capital. I also provide evidence that conglomerates with stronger governance do not improve investment efficiency during recession, which suggests that agency costs cannot fully explain the changes in investment of conglomerates.

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  • Yolanda Yulong Wang, 2023. "Corporate diversification, investment efficiency and the business cycle," Post-Print hal-04005692, HAL.
    • Handle: RePEc:hal:journl:hal-04005692
    DOI: 10.1016/j.jcorpfin.2023.102353
    Note: View the original document on HAL open archive server: https://audencia.hal.science/hal-04005692
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    Keywords

    Corporate diversification Internal capital markets Capital allocation Business cycle Time-varying agency costs Corporate governance;

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