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Journal Articles Journal of Corporate Finance Year : 2023

Corporate diversification, investment efficiency and the business cycle

Abstract

I document the time-varying investment efficiency of conglomerates compared with singlesegment 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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Dates and versions

hal-04005692 , version 1 (22-03-2023)

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Yolanda Yulong Wang. Corporate diversification, investment efficiency and the business cycle. Journal of Corporate Finance, 2023, 78, pp.102353. ⟨10.1016/j.jcorpfin.2023.102353⟩. ⟨hal-04005692⟩

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