Journal of Finance Vol. 68 No. 5 2013
Corporate Diversification and the Cost of Capital
Abstract
We examine whether organizational form matters for a firm's cost of capital. Contrary to the conventional view, we argue that coinsurance among a firm's business units can reduce systematic risk through the avoidance of countercyclical deadweight costs. We find that diversified firms have, on average, a lower cost of capital than comparable portfolios of stand‐alone firms. In addition, diversified firms with less correlated segment cash flows have a lower cost of capital, consistent with a coinsurance effect. Holding cash flows constant, our estimates imply an average value gain of approximately 5% when moving from the highest to the lowest cash flow correlation quintile.
- DOI
- 10.1111/jofi.12067
- Volume
- 68
- Issue
- 5
- Pages
- 1961-1999
- Language
- en
- Sources
- openalex bibtex:phds-export.bib crossref