Corporate diversification,investment efficiency and the business cycle |
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| Affiliation: | 1. Shenzhen Audencia Financial Technology Institute, Shenzhen University, 3688 Nanhai Avenue, Nanshan District, Shenzhen, China;2. Monash Business School, Monash University, Wellington Rd, Clayton, VIC 3800, Australia;3. School of Business and Creative Industries, University of Sunshine Coast, 90 Sippy Downs Dr, Sippy Downs, QLD 4556, Australia;4. Adelaide Business School, Adelaide University, Adelaide, SA 5005, Australia;1. RB 239A, Department of Finance, College of Business Administration, Florida International University, Miami, FL 33199, United States of America;2. Finance and accounting Area, Indian Institute of Management, Indore, India;1. College of Business, Shanghai University of Finance and Economics, Shanghai, China;2. School of Economics and Management, Tongji University, Shanghai, China;3. School of Management, State University of New York at Buffalo, Buffalo, NY, USA;4. Shanghai''s Global Resource Allocation Capacity Research Institute, Shanghai University of Finance and Economics, Shanghai, China |
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| Abstract: | I document the time-varying investment efficiency of conglomerates compared with single-segment 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. |
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