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The value of corporate diversification: a debt market perspective

Subject

Accounting

Publishing details

Social Sciences Research Network

Authors / Editors

Franco F; Urcan O; Vasvari F P

Biographies

Publication Year

2013

Abstract

We assess the net effect of corporate industrial diversification on the cost of public-debt financing by investigating the roles of the coinsurance effect and agency problems. Using a broad set of diversification measures and empirical specifications, we document that firms with industrially diversified operations pay significantly lower bond-offering yields. This negative relation is stronger as the quality of the segment disclosures improves. We further document that the relation between industrial diversification and bond yields has an association with the firm’s inter-segment earnings correlation, a proxy for coinsurance but it has no association with inefficient inter-segment transfers, an indicator for agency problems. The coinsurance effect is supported by similar results from using syndicated bank loans where agency problems are typically addressed through contractual-based monitoring rather than price protection. Overall, our findings indicate that corporate industrial diversification lowers the cost of public debt mainly due to the coinsurance effect, but the quality of segment disclosures also plays an important role.

Series

Social Sciences Research Network