سرمایه گذاری کنگلومرایی تحت شرایط مختلف بازار سرمایه

This paper studies the investment of diversified and focused firms under various capital market conditions. When external capital becomes more costly at the aggregate level, investment declines in focused firms but remains unchanged in diversified firms. This investment advantage enjoyed by diversified firms could attribute to both their easy access to external capital and their ability to substitute internal capital markets for costly external markets. Consistent with the internal capital market argument, our findings show that the investment advantage exists for diversified firms even after we control for their easy access to external markets. We also find that the role of internal markets in financing investment is more important for diversified firms that are more financially constrained in external markets. Finally, we find that the segment-level investment becomes more efficient in conglomerates’ internal capital markets under depressed external capital market conditions. Overall, our findings suggest that internal capital allocation functions as a valuable and efficient substitute for diversified firms in a tightened external capital market.

Capital market conditions can affect investment in diversified firms and focused firms differently. In a tight capital market, the supply of external funds decreases and the cost of external financing increases. During such market conditions, diversified firms can better finance their investment than focused firms for two reasons. First, diversified firms are less affected by depressed capital market conditions in their access to external capital markets.1 Recently, Dimitrov and Tice (2006) study empirically this advantage and find supporting evidence. Second, when diversified firms face limited access to external funds, they can substitute their internal capital markets for costly external markets (see, e.g., Williamson, 1975, Gertner et al., 1994, Stein, 1997 and Matsusaka and Nanda, 2002). In the paper, we focus on the role of internal capital markets to study the investment advantage of diversified firms, as well as their investment efficiency. We provide empirical evidence on the value creation of internal capital markets in a depressed capital market. We first study empirically how the investments of diversified firms and focused firms are affected by financing conditions in external capital markets. Many studies in the literature have shown that diversified firms’ investment is less affected by external market conditions compared to focused firms.2 However, the insensitivity of diversified firms’ investment could attribute to not only the availability of their internal capital allocation but also their easy access to external capital markets. Thus, to focus on the substitution effect of internal markets, we need to exclude the external market effect. We do so by controlling for the different external financing constraints faced by diversified and focused firms. In particular, we measure a firm’s external financing constraints using three measures: bank-dependency, firm size, and the amount of cash dividends. Bank-dependent firms, small firms, and firms that do not pay cash dividends could face more external financing constraints compared to bank-independent firms, large firms, and firms that pay cash dividends. We use these three measures to disaggregate our sample into sub-samples of financially constrained firms and financially unconstrained firms. Within each subsample, diversified and focused firms should face a similar degree of financing constraints in external capital markets. We use these subsamples to study the investment across diversified and focused firms. We find that for those diversified firms and focused firms that face a similar degree of external financing constraints, the investment of diversified firms is still less sensitive to capital market conditions than that of focused firms. By excluding the effect from external market access, this finding is consistent with the argument that diversified firms substitute their internal markets for costly external markets in financing their investment projects. Next, we study whether the substitution effect of internal capital markets is more important to the set of diversified firms as predicted by the internal market argument. According to the internal market argument, the availability of internal capital markets should be more beneficial to those diversified firms that have limited access to external capital markets, but may not be so for those firms that do not face financing constraints in external markets. In the paper, we study external financing under depressed external market conditions to identify the type of diversified firms that benefit more from internal capital markets. We find that for financially constrained diversified firms, the impact of negative market shocks on their external financing is similar to how focused firms are affected. In contrast, for financially unconstrained diversified firms, their external financing is less sensitive to market shocks than is the external financing of focused firms. These findings on financing sensitivities, together with our earlier findings on investment sensitivities, suggest that financially constrained and unconstrained diversified firms finance their investment in different manners during depressed external capital market conditions. In particular, our findings on financially constrained diversified firms suggest that these diversified firms rely less on their access to external markets and more on their internal markets to finance their investment when external financing becomes more costly. As a result, even if these diversified firms have the similar limited access to external markets as focused firms do, their investment is less affected by negative market shocks than is the investment of focused firms. On the other hand, according to our findings on financially unconstrained diversified firms, these firms do not have to substitute internal markets for external markets when external markets becomes more costly at the aggregate level, since their access to external markets is insensitive to negative market shocks. Simply put, our findings suggest that the dependence on internal capital markets is strongest in financially constrained diversified firms, the set of firms predicted by the internal market argument. We further study the efficiency of internal capital allocation during depressed external market conditions. Many recent studies document evidence of cross-subsidization within conglomerates’ internal capital markets (e.g., Rajan et al., 2000). It is possible that tighter external financing constraints can pressure diversified firms to emphasize more on good investment opportunities to survive the financial hardship. Thus, we hypothesize that diversified firms improve investment efficiency during tightened external markets. To test this hypothesis, we follow Rajan et al. (2000) and construct relative value added to measure the investment efficiency in internal capital markets. Our results support our hypothesis, showing that internal capital markets within diversified firms become more efficient during depressed market conditions, especially so for those financially constrained diversified firms. Finally, we confirm the findings in the literature that when the cost of external financing increases, the values of diversified firms are less adversely affected than are the values of focused firms (see Yan, 2006). This result (on the value sensitivities) is especially significant for those firms with good investment opportunities but insignificant for those firms with poor investment opportunities. Overall, our results support the argument that internal capital markets function as a valuable and efficient substitute for diversified firms in tightened external capital markets. We also check the robustness of our empirical results. It is possible that other uncontrolled individual firm characteristics may simultaneously affect both firms’ investment sensitivities and their decision to diversify. Specifically, firms that are insensitive to capital market conditions due to certain firm-specific characteristics may choose to diversify, resulting in the observed investment insensitivity in diversified firms. To address this concern, we isolate the focused firms that eventually diversify during our sample period from the focused firms that remain focused. We then compare the investment sensitivities between these two kinds of focused firms. Our comparison shows that the pre-diversifying and the non-diversifying focused firms respond to capital market conditions in a similar manner. Thus, our results on the investment insensitivities in diversified firms are unlikely to be driven by the pre-diversifying factors of these firms.3 It is also possible that diversified firms have poorer investment opportunities and less investment needs than focused firms, thereby responding differently to external market conditions. We first address this concern by controlling for the set of investment opportunities available to a firm in all regressions. In an untabulated test, we further create subsamples of firms with similar investment opportunities and study firm investment separately within each subsample. Our results based on these subsamples show that our earlier findings on the different investment sensitivities between diversified and focused firms cannot be explained by the difference in their investment opportunities. Our paper contributes to the literature on the impact of macroeconomic factors on firm investment. Most studies in this literature focus on firms’ access to external markets. For example, Gertler and Gilchrist, 1994 and Kashyap et al., 1994, and Almeida and Campello (2007) find that firm investment is more sensitive to changes in credit market conditions for those firms with more limited access to capital markets (see also Guariglia, 2008). Our paper contributes by studying how internal capital markets can help diversified firms circumvent external financing constraints and finance their investment. Campello (2002) also finds evidence supporting the role of internal capital markets in relaxing credit constraints. However, our paper differs in three ways. First, unlike Campello (2002), who focuses on the internal capital markets in the financial conglomerates, we focus on the internal capital markets in the non-financial conglomerates. Thus, our study can also contribute to the diversification discount literature, which focuses primarily on the US nonfinancial diversification.4 Our results suggest that non-financial diversification creates value when external markets become costly. Second, Campello (2002) compares the investment policies between small independent banks and small banks that are affiliated with large banks. He finds that small bank affiliates can benefit from internal capital markets only when their large partners in the affiliation are able to obtain external funds at a cost advantage. In contrast, we compare independent single-segment firms with diversified firms rather than with divisions within diversified firms. Unlike the results in Campello (2002), our results suggest that even if diversified firms have no cost advantage to access external funds, their diversification status and internal capital markets can still help them better survive costly external capital markets. Third, we also study how the efficiency of internal capital markets is affected by external financing constraints. Our paper also contributes to the empirical literature on the difference between diversified and focused firms. There are three broad approaches in this literature. The first approach is to compare the overall value of diversified and focused firms. See, e.g., Lang and Stulz, 1994 and Berger and Ofek, 1995, and Servaes (1996) on the existence of diversification discount.5 See also Graham et al., 2002, Dos Santos et al., 2008 and Francis et al., 2008, and Doukas and Kan (2008) on the value of diversification from studies on mergers and acquisitions. The second approach focuses on the costs associated with internal capital allocation, such as cross-subsidization in internal capital markets (e.g., Lamont, 1997, Shin and Stulz, 1998, Rajan et al., 2000, Scharfstein and Stein, 2000 and Inderst and Lzux, 2005).6 The third approach focuses on the benefits of internal markets as we discussed at the beginning of this introduction. Our paper follows the third approach. Our findings provide direct support for the value of internal capital markets in substituting costly external capital markets. Finally, our study is also related to the literature on the influence of financial constraints on the value of diversification. Khanna and Palepu, 2000 and Lins and Servaes, 1999 find that diversification is more valuable in emerging capital markets, since large diversified firms can better access external markets. Billett and Mauer (2003) find that financial constraints at the segment level drive the relation between firm value and internal capital markets. Our findings are consistent with this literature, though we focus on the market-level financing constraints over time rather than the segment-level or the country-specific constraints. The paper is organized as follows. Section 2 discusses sample selection and the construction of variables. Section 3 develops testable hypotheses on the substitution effect of internal capital markets and provides test results. Section 4 concludes.

In this paper, we study the investment and external financing of diversified and focused firms under various financing conditions in external capital markets. We also study how the values of diversified and focused firms are affected by various market conditions. We find that when external capital is more costly at the aggregate level, the investment of focused firms decreases but the investment of diversified firms remains unchanged. More importantly, we find that the different investment sensitivities still exist between diversified and focused firms even after we control for their different access to external capital markets. We also check the robustness of our results and show that our results are unlikely to be driven by either the pre-diversifying difference between diversified and focused firms or their difference in investment opportunity sets. We further study the external financing activities for diversified and focused firms. We find that for the diversified and focused firms that are financially constrained, the amounts of their external financing are affected in a similar fashion when the aggregate external financing cost increases. However, for the diversified and focused firms that are not financially constrained, the diversified firms’ external financing is less affected by an increase in external financing cost than is the external financing of the focused firms. Next, we study the efficiency of internal capital allocation under various capital market conditions. We find that in a more depressed capital market, internal capital markets become more efficient. Finally, we also find that the values of diversified firms are reduced to a less degree than the values of focused firms during depressed capital market conditions, especially for those diversified firms with good investment opportunities. Our findings are consistent with the theories on the substitution effect of internal capital market. They suggest that the ability to substitute external capital markets with internal capital markets helps diversified firms alleviate external financing constraints when the financing cost in external markets is high. This is especially the case for financially constrained diversified firms, which rely more on their internal markets and less on external markets, compared to those diversified firms that are not financially constrained in external markets. Our findings also suggest that internal capital markets become more efficient and create value for diversified firms during costly capital market conditions.