The Value of Corporate Diversification: A Debt Market Perspective

Abstract

We assess the impact of corporate industrial diversification on the cost of public-debt financing and investigate how this relation is affected by the quality of segment disclosures. Using a large sample of U.S. bond issues, we document that the degree of a firm’s industrial diversification is associated with significantly lower bond-offering yields, and that this association is more pronounced for firms with higher segment disclosure quality. These findings suggest that public debt-holders are better able to assess the level of co-insurance provided by a firm’s diversification status when segment disclosures are superior. We further investigate the role of segment disclosures on the pricing of syndicated loans where the size of the bank syndicate decreases access to private information, thus making public segment reporting more relevant. We find that segment disclosure quality has a similar effect on the relation between a firm’s diversification and the syndicated loan spreads when the bank syndicates are large. Overall, our results highlight the importance of segment disclosure quality when assessing the effect of diversification on a firm’s cost of debt financing.