This paper studies the relationship between corporate liquidity and diversification. The key finding is that diversified firms hold significantly more cash than stand-alone firms because they are diversified in their cash flow. Lower cross-divisional correlations in cash flow and lower correlations between investment opportunity and cash flow correspond to higher cash holdings. Even in financially constrained firms, the increases of diversification degree through correlations in cash flow and correlations between investment opportunity and cash flow also correspond to higher cash holdings. These results show that the agency motive for cash holdings appears to explain the increase in the corporate cash holdings.
|Title of host publication||Proceedings of the International Conference on Administrative Science, Policy and Governance Studies (ICAS-PGS 2017) and the International Conference on Business Administration and Policy (ICBAP 2017)|
|Publication status||Published - Dec 2017|