Standalone Firms, Conglomerates, and Bond Return

Abstract

Over the past two decades, an increasing number of corporations have become large conglomerates by expanding into multiple industries. In this paper, we investigate whether this trend yields an impact on bond returns based on a sample of corporate bonds from 1994 to 2015. We find that bonds issued by conglomerates have significantly higher returns than bonds issued by single-industry firms after controlling for bond characteristics, firm characteristics, and market systematic factors. Bond return of standalone firms exhibits greater volatility and is more sensitive to market shocks. Further analysis suggests that bond return drops significantly when a firm initially ventures from single to multiple industries, which is consistent with the value-reducing effect of diversification suggested by the diversification discount literature. As a conglomerate diversifies further, the value-reducing effect diminishes and bond return increases as the risk-reducing or wealth transfer effect associated with diversification becomes a dominant value driver for bondholders.