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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.

Suggested Citation

  • 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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