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An Analysis of Divisional Investment Policies

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  • Hyun-Han Shin
  • Rene M. Stulz

Abstract

This paper investigates the divisional investment policies of diversified firms. We find that investment of the smallest division of diversified firms is significantly related to the cash flow of the other segments. We then show that the smallest division's investment is more sensitive to the cash flow of the other divisions for firms where one expects aggregate investment to be related to cash flow also, namely low q firms and firms with high leverage. This and other evidence we provide is consistent with what we call the bureaucratic rigidity hypothesis. This hypothesis states that relative allocations of investment funds in diversified firms are sticky. We fail to find support for the view that diversified firms allocate more funds to divisions in industries with better investment opportunities

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5639.

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Date of creation: Jun 1996
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Handle: RePEc:nbr:nberwo:5639

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  1. Comment, Robert & Jarrell, Gregg A., 1995. "Corporate focus and stock returns," Journal of Financial Economics, Elsevier, vol. 37(1), pages 67-87, January.
  2. Simon G. Gilchrist & Ben Bernanke & Mark Gertler, 1994. "The financial accelerator and the flight to quality," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 94-18, Board of Governors of the Federal Reserve System (U.S.).
  3. Owen Lamont, 1996. "Cash Flow and Investment: Evidence from Internal Capital Markets," NBER Working Papers 5499, National Bureau of Economic Research, Inc.
  4. Steven N. Kaplan & Luigi Zingales, 1995. "Do Financing Constraints Explain Why Investment is Correlated with Cash Flow?," NBER Working Papers 5267, National Bureau of Economic Research, Inc.
  5. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  6. Berger, Philip G. & Ofek, Eli, 1995. "Diversification's effect on firm value," Journal of Financial Economics, Elsevier, vol. 37(1), pages 39-65, January.
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Cited by:
  1. Mudambi, Ram, 1999. "MNE internal capital markets and subsidiary strategic independence," International Business Review, Elsevier, vol. 8(2), pages 197-211, April.
  2. R. Glenn Hubbard, 1997. "Capital-Market Imperfections and Investment," NBER Working Papers 5996, National Bureau of Economic Research, Inc.
  3. Lamont, Owen, 1997. " Cash Flow and Investment: Evidence from Internal Capital Markets," Journal of Finance, American Finance Association, vol. 52(1), pages 83-109, March.
  4. Felipe Balmaceda, 2002. "Corporate Diversification: Good for Some Bad for Others," Documentos de Trabajo, Centro de Economía Aplicada, Universidad de Chile 141, Centro de Economía Aplicada, Universidad de Chile.
  5. von Eije, Henk & Westerman, Wim, 2002. "Multinational cash management and conglomerate discounts in the euro zone," International Business Review, Elsevier, vol. 11(4), pages 453-464, August.

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