Firm diversification and the value of corporate cash holdings

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This paper studies the effect of firm diversification on the value of corporate cash holdings. We develop two hypotheses based on efficient internal capital market and agency problems. We find that the value of cash is lower in diversified firms than in single-segment firms, and that firm diversification is associated with a lower value of cash in both financially unconstrained and constrained firms. We find that firm diversification has a negative (zero) impact on the value of cash among firms with a lower (higher) level of corporate governance. These findings are consistent with the interpretation that firm diversification reduces the value of corporate cash holdings through agency problems. © 2009 Elsevier B.V.
Original languageUndefined
Pages (from-to)741-758
Number of pages18
JournalJournal of Corporate Finance
Issue number3
Publication statusPublished (in print/issue) - 1 Jun 2011

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