Corporate Diversification and the Business Cycle: Interactions between Internal and External Capital Market
Date Issued
2007
Date
2007
Author(s)
Huang, Chih-Wei
DOI
en-US
Abstract
In this paper, I explicitly consider interaction effect between the efficiency of internal capital market and the condition of external capital markets while considering asymmetric effect of the dependence of external financing to show that diversification can help mitigate failures in external capital markets. We test the data from 1977 to 2002, which cover three distinct business cycles.
We have three key findings. First, our results prove that if diversified firms with internally efficiency are under poor capital market condition, diversification discounts reduce to the least, which present both “more-money” and “smarter-money” effect of diversified firms. Second, we find that asymmetric financing condition over industries is much more severe in non-recession than in recession and internal capital markets of diversified firms help alleviate the effect of external financial constraints on investment. Finally, we show that under the condition of the most difficult financing conditions, efficiency of internal capital market play an important role.
The results of this paper may help corporate managers to consider whether they should become diversified firms. Diversification may be beneficial for those new companies or industries in the beginning stage of its life cycle, which depend highly on external financing.
Subjects
多角化
景氣循環
融資限制
內部資本市場
diversification
business cycle
financing constraints
internal capital market
Type
thesis