Firm diversification and the value of corporate cash holdings |
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| Authors: | Zhenxu Tong |
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| Institution: | 1. Dongling School of Economics and Management, University of Science and Technology Beijing, China;2. Alliance Manchester Business School, University of Manchester, United Kingdom;3. School of Economics, Finance and Management, University of Bristol, United Kingdom;1. HSBC Business School, Peking University, University Town, Nanshan District, Shenzhen, 518055, China;2. SKK Business School, Sungkyunkwan University, Jongno-gu, Seoul, 03063, Republic of Korea;1. Fogelman College of Business & Economics, The University of Memphis, Memphis, TN 38152, United States;2. College of Business Administration, Loyola Marymount University, Los Angeles, CA 90045, United States;3. Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549, United States;1. DeGroote School of Business, McMaster University, 1280 Main Street West, Hamilton, Ontario, Canada L5M 8b9;2. College of Management, University of Massachusetts Boston, Boston, MA 02125-3393, USA;1. University of New Hampshire, Peter T. Paul College of Business and Economics, 10 Garrison Avenue, Durham, NH 03824, United States;2. Department of Finance, Tippie College of Business, University of Iowa, 108 John Pappajohn Business Bldg., S320, Iowa City, IA 52242-1994, United States;3. Department of Finance, College of Business and Public Administration, University of North Dakota, Grand Forks, ND 58202, United States |
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| Abstract: | This paper studies the effect of firm diversification on the value of corporate cash holdings. We develop two hypotheses based on efficient internal capital market and agency problems. We find that the value of cash is lower in diversified firms than in single-segment firms, and that firm diversification is associated with a lower value of cash in both financially unconstrained and constrained firms. We find that firm diversification has a negative (zero) impact on the value of cash among firms with a lower (higher) level of corporate governance. These findings are consistent with the interpretation that firm diversification reduces the value of corporate cash holdings through agency problems. |
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