The extent to which conglomerates face frictions in external capital markets has implications for their internal capital allocation. We find that, during recessions, when external financing costs are higher, conglomerates improve the efficiency of internal capital markets by increasing the allocation of funds to high q divisions relative to low q divisions. The improvement is significantly higher for conglomerates that are likely to face more binding financial constraints. This evidence suggests that although financial constraints impair managers’ ability to undertake positive net present value projects, they improve the quality of project selection by reducing free cash flow and pressuring managers to fund the more valuable investment opportunities. It is consistent with theories stressing the benefits of internal capital markets in the presence of external capital market imperfections.

We examine whether restructuring decisions by diversified firms are related to their excess values. We find that changes in diversification level, measured as changes in the number of segments or number of industries, are positively and significantly associated with excess values. Further, at lower levels of excess values, firms are significantly more likely to increase focus than maintain their existing levels of diversification and, at higher levels of excess values, they are significantly more likely to diversify further than maintain or reduce their current levels of diversification. These findings indicate that excess value variations are meaningful and predict restructuring decisions.

We investigate the dynamics of observed and target leverage ratios and deviations from the targets. The cross-sectional persistence in leverage ratios is driven by persistent targets, whereas time-series variation is driven by transitory deviations from targets. Consistent with dynamic trade-off theories, persistence is higher when the costs of deviating from targets are lower and when the adjustment costs are higher. Deviations are less persistent for firms that are over-levered and firms that are smaller, younger, or more focused or that have lower credit ratings. In recessions, excess leverage is less persistent for larger firms and is more persistent for smaller firms.

This paper examines whether shareholder value-maximizing corporate governance mechanisms assist in reducing the managerial incentive to enter value-destroying bank acquisitions. We find that diversifying bank acquisitions earn significantly negative announcement period abnormal returns (AR) for bidder banks whereas focusing acquisitions earn zero AR. We then find that corporate governance variables (such as CEO share and option ownership and a smaller board size) in the bidding bank are less effective in diversifying acquisitions than in focusing acquisitions. These results are robust to the inclusion of the usual control variables.

We examine whether market and operating performance affect corporate financing behavior because they are related to target leverage. Our focus on firms that issue both debt and equity enhances our ability to draw inferences. Consistent with dynamic trade-off theories, dual issuers offset the deviation from the target resulting from accumulation of earnings and losses. Our results also imply that high market-to-book firms have low target debt ratios. On the other hand, consistent with market timing, high stock returns increase the probability of equity issuance but have no effect on target leverage.

Studies document persistent unexplained gender-based wage gap in labor markets. At the executive level, where skill and education are similar, career interruptions and differences in risk preferences primarily explain the extant gender-based pay gap. This study focuses on CFO compensation contracts of Execucomp firms (1992–2020) and finds no gender-based pay gap. This paper offers several explanations for this phenomenon, such as novel evidence on the risk preferences of females with financial expertise and changes in the social and regulatory climate.