Firm Diversification And The Value Of Corporate Cash Holdings

This paper studies the relation between firm diversification and the value of corporate cash holdings. The authors develop four competing hypotheses based on efficient internal capital market, agency problems, coinsurance effect, and shareholder-bondholder conflicts. They find that the value of cash holdings is lower in diversified firms than single-segment firms, a result both statistically and economically significant. They find that firm diversification is associated with a lower value of cash in both financially unconstrained and constrained firms, and that the value of cash is even lower for the diversified firms with more restrictions on shareholder rights.