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Value of Conglomerates and Capital Market Conditions


  • An Yan


This article studies variations in the value of diversification across time under variouscapital market conditions. I find that when external capital is more costly at the aggregatelevel, the value of conglomerates increases relative to focused firms. I also find that thisincrease is greater for financially constrained conglomerates, such as bank-dependent or small conglomerates. My findings support the theories on the advantage of diversification over focus. They suggest that the ability to substitute external capital markets with internalcapital markets creates value for conglomerates when the financing cost in external marketsis high, especially for those conglomerates that are financially constrained.

Suggested Citation

  • An Yan, 2006. "Value of Conglomerates and Capital Market Conditions," Financial Management, Financial Management Association, vol. 35(4), Winter.
  • Handle: RePEc:fma:fmanag:yan06

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    References listed on IDEAS

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    7. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2003. "Law and finance: why does legal origin matter?," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 653-675, December.
    8. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "Serial Default and the "Paradox" of Rich-to-Poor Capital Flows," American Economic Review, American Economic Association, vol. 94(2), pages 53-58, May.
    9. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
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    11. Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 37-53.
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    Cited by:

    1. Cline, Brandon N. & Garner, Jacqueline L. & Yore, Adam S., 2014. "Exploitation of the internal capital market and the avoidance of outside monitoring," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 234-250.
    2. Yan, An & Yang, Zaihui & Jiao, Jie, 2010. "Conglomerate investment under various capital market conditions," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 103-115, January.
    3. Stefan Erdorf & Thomas Hartmann-Wendels & Nicolas Heinrichs & Michael Matz, 2012. "Corporate Diversification and Firm Value: A Survey of Recent Literature," Cologne Graduate School Working Paper Series 03-01, Cologne Graduate School in Management, Economics and Social Sciences.
    4. Joseph Chen & Samuel Hanson & Harrison Hong & Jeremy C. Stein, 2008. "Do Hedge Funds Profit From Mutual-Fund Distress?," NBER Working Papers 13786, National Bureau of Economic Research, Inc.
    5. Che, Xin & Liebenberg, Andre P., 2017. "Effects of business diversification on asset risk-taking: Evidence from the U.S. property-liability insurance industry," Journal of Banking & Finance, Elsevier, vol. 77(C), pages 122-136.
    6. Jiao, Jie & Qiu, Bin & Yan, An, 2013. "Diversification and heterogeneity of investor beliefs," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3435-3453.
    7. Finnerty, John D. & Jiao, Jie & Yan, An, 2012. "Convertible securities in merger transactions," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 275-289.
    8. Stefan Erdorf & Thomas Hartmann-Wendels & Nicolas Heinrichs & Michael Matz, 2013. "Corporate diversification and firm value: a survey of recent literature," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 27(2), pages 187-215, June.
    9. Nippa, Michael, 2011. "Zur Notwendigkeit des Corporate Portfolio Management: Eine Würdigung der wissenschaftlichen Forschung der letzten vier Jahrzehnte," Freiberg Working Papers 2011,02, TU Bergakademie Freiberg, Faculty of Economics and Business Administration.
    10. Volkov, Nikanor I. & Smith, Garrett C., 2015. "Corporate diversification and firm value during economic downturns," The Quarterly Review of Economics and Finance, Elsevier, vol. 55(C), pages 160-175.

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