Abstract
We find new facts that relate the evolution of firm scope to the changing frictions in external capital markets over the last three decades. We find that large, diversified publicly traded firms increase their scope during times of high external capital market frictions, such as in the recent Great Recession. Moreover, during these times firms diversify their investment needs and cash flow across industries. We also find similar phenomena outside diversified public firms. Examining the mergers and acquisitions activity of stand-alone and diversified private firms, we uncover similar patterns. In aggregate data, we find that the composition of mergers shifts from focused to diversifying and back with changes in external market conditions. Our evidence is broadly consistent with the notion that firms diversify their scope in response to tightening in external capital markets.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 21-50 |
| Number of pages | 30 |
| Journal | Journal of Financial Economics |
| Volume | 127 |
| Issue number | 1 |
| DOIs | |
| State | Published - Jan 2018 |
Funding
We thank the editor (Toni Whited) and an anonymous referee for insightful comments. Cláudia Custódio, Alex Edmans, Steve Kaplan, Henri Servaes, João Victor Issler, Belen Villalonga, and seminar participants at HEC Paris, London Business School, Luso-Brazilian Finance Network (Lubrafin) conference, and Nova School of Business and Economics provided helpful discussions. Amit Seru and Gregor Matvos thank the Fama Miller Center at the University of Chicago Booth School of Business for financial support. All errors are our own.
Keywords
- Conglomerates
- Diversification
- Firm boundaries
- Internal capital markets
- Theory of firm
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics
- Strategy and Management