Financial market frictions and diversification

Gregor Matvos, Amit Seru and Rui C. Silva

Journal of Financial Economics, 2018, vol. 127, issue 1, 21-50

Abstract: We find new facts that relate the evolution of firm scope to the changing frictions in external capital markets over the last three decades. We find that large, diversified publicly traded firms increase their scope during times of high external capital market frictions, such as in the recent Great Recession. Moreover, during these times firms diversify their investment needs and cash flow across industries. We also find similar phenomena outside diversified public firms. Examining the mergers and acquisitions activity of stand-alone and diversified private firms, we uncover similar patterns. In aggregate data, we find that the composition of mergers shifts from focused to diversifying and back with changes in external market conditions. Our evidence is broadly consistent with the notion that firms diversify their scope in response to tightening in external capital markets.

Keywords: Theory of firm; Firm boundaries; Conglomerates; Diversification; Internal capital markets (search for similar items in EconPapers)
JEL-codes: D92 E22 G01 G3 L21 L25 (search for similar items in EconPapers)
Date: 2018
References: Add references at CitEc
Citations: View citations in EconPapers (23)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X17302386
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:127:y:2018:i:1:p:21-50

DOI: 10.1016/j.jfineco.2017.09.006

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().