Corporate Diversification and Credit Constraints: Real Effects across the Business Cycle

Valentin Dimitrov and Sheri Tice

The Review of Financial Studies, 2006, vol. 19, issue 4, 1465-1498

Abstract: We study whether differences in access to credit cause focused firms to perform differently from diversified firms in the product market. Prior work has identified binding credit constraints for bank-dependent firms during recessions. We assess whether corporate diversification alleviates these constraints. We find that during recessions sales growth rates drop more for bank-dependent focused firms than for rival segments of bank-dependent diversified firms. We also find that during recessions inventory growth rates drop more for bank-dependent focused firms than for bank-dependent diversified firms even after we control for contemporaneous sales growth. Consistent with a credit constraint explanation, we find no difference in the sensitivities to recessions of bank-independent focused and bank-independent diversified firms. (JEL G30, G31, G32) Copyright 2006, Oxford University Press.

Date: 2006
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