Leverage and Investment in Diversified Firms
Written by Paula Widiastuti, SE, MSM on 8/26/2008by. Seoungpil Ahn and David J. Denis
Abstract
Within diversified firms, the negative impact of leverage on investment is significantly greater for high q than for low q segments, and significantly greater for non-core than for core segments. This is consistent with the view that diversified firms allocate a disproportionate share of their debt service burden to their higher q and non-core segments. We also find that among low-growth firms, the positive relation between leverage and firm value is significantly weaker in diversified firms than in focused firms. We conclude that the disciplinary benefits of debt are partially offset by the additional managerial discretion in allocating debt service that is provided by the diversified organizational structure.
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