Abstract
This paper studies how firm diversification affects the value of corporate cash holdings. We develop four hypotheses based on efficient internal capital market, agency problems, coinsurance effect, and shareholder-bondholder conflicts. We find that the value of cash holdings is lower in diversified firms than single-segment firms. We find that firm diversification is associated with a lower value of cash in both financially unconstrained and constrained firms, and that the value of cash is even lower for the diversified firms with more restrictions on shareholder rights. The findings are most consistent with the interpretation that firm diversification reduces the value of corporate cash holdings through agency problems.
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