Corporate diversification, investment efficiency and the business cycle

Yolanda Yulong Wang
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Yolanda Yulong Wang: SAFTI - Shenzhen Audencia Financial Technology Institute

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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.

Keywords: Corporate; diversification; Internal; capital; markets; Capital; allocation; Business; cycle; Time-varying; agency; costs; Corporate; governance (search for similar items in EconPapers)
Date: 2023-02
New Economics Papers: this item is included in nep-cfn, nep-eff and nep-fdg
Note: View the original document on HAL open archive server: https://audencia.hal.science/hal-04005692
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Citations: View citations in EconPapers (3)

Published in Journal of Corporate Finance, 2023, 78, pp.102353. ⟨10.1016/j.jcorpfin.2023.102353⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04005692

DOI: 10.1016/j.jcorpfin.2023.102353

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