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An Analysis of Divisional Investment Policies

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Author Info
Hyun-Han Shin
Rene M. Stulz

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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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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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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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. [Downloadable!] (restricted)
  2. Owen Lamont, 1996. "Cash Flow and Investment: Evidence from Internal Capital Markets," NBER Working Papers 5499, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February. [Downloadable!] (restricted)
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  4. Comment, Robert & Jarrell, Gregg A., 1995. "Corporate focus and stock returns," Journal of Financial Economics, Elsevier, vol. 37(1), pages 67-87, January. [Downloadable!] (restricted)
  5. Berger, Philip G. & Ofek, Eli, 1995. "Diversification's effect on firm value," Journal of Financial Economics, Elsevier, vol. 37(1), pages 39-65, January. [Downloadable!] (restricted)
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  1. Owen Lamont, 1996. "Cash Flow and Investment: Evidence from Internal Capital Markets," NBER Working Papers 5499, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. R. Glenn Hubbard, 1997. "Capital-Market Imperfections and Investment," NBER Working Papers 5996, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Felipe Balmaceda, 2002. "Corporate Diversification: Good for Some Bad for Others," Documentos de Trabajo 141, Centro de Economía Aplicada, Universidad de Chile. [Downloadable!]
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