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Corporate diversification, investment efficiency and the business cycle11This work is supported by Shenzhen Humanities & Social Sciences Key Research Bases

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  • Wang, Yolanda Yulong

Abstract

I document the time-varying investment efficiency of conglomerates compared with single-segment 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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  • Wang, Yolanda Yulong, 2023. "Corporate diversification, investment efficiency and the business cycle11This work is supported by Shenzhen Humanities & Social Sciences Key Research Bases," Journal of Corporate Finance, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:corfin:v:78:y:2023:i:c:s0929119923000020
    DOI: 10.1016/j.jcorpfin.2023.102353
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