The Effect of Financial Market Frictions to Firm’s Diversification Level in Indonesia

Abstract

New interesting facts had emerged within the last few decades. Diversification behavior of firms are believed to increase in parallel with the pattern of external market frictions. Firms with high level of diversification can alter the cost of tight financial market frictions by reallocating capital internally between divisions. Several facts are argued and demonstrated in determining whether diversification creates higher value and benefit for firms during times of distress. Using data provided by the Indonesian Stock Exchange (IDX) and the Indonesian Bond Pricing Agency (IBPA), it is verified that well-diversified firms in Indonesia can mitigate the shocks in the external market. This research is conducted under a time period of 10 years, from 2008 to 2017.