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The hedging benefits of industrial and global diversification: Evidence from economic downturns
Author(s) -
Liu Yixin,
Mauer David C.,
Zhang Yilei
Publication year - 2018
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/jbfa.12354
Subject(s) - diversification (marketing strategy) , endogeneity , economics , business cycle , monetary economics , business , econometrics , macroeconomics , marketing
In a large panel of US firms, we find that discounts for industrial and global diversification significantly decrease in economic downturns, suggesting a valuable hedging benefit of diversification. This finding is robust to a wide variety of business cycle and economic uncertainty variables and persists when we account for endogeneity of industrial and global diversification. We further analyze the channels through which diversification is more valuable in economic downturns. We find that the value improvement is largely explained by increases in investment and product market performance relative to focused firms. There is no evidence that improved internal capital market efficiency or access to external finance contribute to the hedging value of diversification.