Does corporate diversification provide insurance against economic disruptions?

Varouj Aivazian, Mohammad M. Rahaman and Simiao Zhou

Journal of Business Research, 2019, vol. 100, issue C, 218-233

Abstract: Can the product diversification strategy of a firm provide a natural hedge against adverse economic conditions? We use a quasi-natural experiment to show that diversification attenuates the detrimental impact of unanticipated economic disruptions and enables diversified firms to invest more efficiently than similar focused firms. We find that access to internal capital markets, segment cash-flow coinsurance, and greater predictive accuracy are all channels that enhance the resiliency of conglomerates during economic disruptions. Our results suggest that firms' product diversification is an important conduit for the propagation of systemic shocks.

Keywords: Product diversification; Economic shocks; Investment efficiency; Resource allocation (search for similar items in EconPapers)
JEL-codes: G01 G31 L25 M40 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (20)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbrese:v:100:y:2019:i:c:p:218-233

DOI: 10.1016/j.jbusres.2019.03.044

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