Why Do Firms Merge and Then Divest? A Theory of Financial Synergy

Fluck, Zsuzsanna; Lynch, Anthony W.

doi:10.1086/209617

Cited by 200 publications

(92 citation statements)

References 33 publications

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“…Using various econometric techniques, Campa and Kedia (2002), Villalonga (2004), Whited (2001), Fluck and Lynch (1999), and Lamont and Polk (2001) all find that the discount can be at least partly explained by selection bias, endogeneity problems, and measurement error. A similar argument is made by Maksimovic and Phillips (2002): less productive firms tend to diversify, but diversity is not causing the discount.…”

Section: Theorymentioning

confidence: 99%

Do financial conglomerates create or destroy value? Evidence for the EU

Lelyveld

Knot

2009

Journal of Banking & Finance

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There is an ongoing debate whether firm focus creates or destroys shareholder value. Earlier literature has shown significant diversification discounts: firms that engage in multiple activities are valued less. Various factors are important in the size of the discount, for example crosssubsidization and agency problems. The extant literature, however, generally focuses on nonfinancial firms or traditional banking (cf Laeven and Levine (2007) and Schmid and Walter (2006)). Our paper focuses specifically on the valuation of bank-insurance conglomerates. We find no universal diversification discount but significant variability. Size, complexity and risk seem to be important determinants. JEL codes:G2, G3, L2

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Section: Theorymentioning

confidence: 99%

Do financial conglomerates create or destroy value? Evidence for the EU

Lelyveld

Knot

2009

Journal of Banking & Finance

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“…There is extensive body of literature that documents the fact that internal capital markets of diversified firms enable them to find profitable projects that, because of information asymmetries and agency costs, the external capital market would not be able to finance (Williamson, 1975;Gertner et al, 1994;Fluck & Lynch, 1999;Stein, 1997;Matsusaka & Nanda, 2002;Hovakimian, 2011;Maksimovic & Phillips, 2013). Contrary views, however, are explained by models where the internal capital market allocates too much funding to its weakest divisions.…”

Section: Theoretical Backgroundmentioning

confidence: 99%

“…Numerous studies find that the more financially constrained firms display higher ICFS than less constrained firms (Fazarri et al, 1988;Almeida & Campello, 2007;Beatty et al, 2010). Some studies have incorporated proxies that affect the relationship between ICFS and investment outlays such as the marginal cost of capital (Cleary et al, 2007), management quality practices (Attig & Cleary, 2014) and FDI (Magud & Sosa, 2015) so as to resolve the contradictory views on the use of ICFS as an indicator of financial constraint.Evidence from developed countries reveals that the internal capital markets of conglomerates may enable subsidiaries to fund profitable investments that the external capital market would not be able to finance because of information asymmetries and agency costs that make external financing costly (Williamson, 1975;Gertner et al, 1994;Stein, 1997;Fluck & Lynch, 1999;Maksimovic & Phillips, 2013).…”

Section: Introductionmentioning

confidence: 99%

Corporate Financial Constraints and Internal Capital Markets: Evidence from Emerging Countries

Uğurlu¹,

Altıok-Yılmaz²,

Akben-Selçuk³

2016

AFR

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This paper investigates whether the internal capital markets of business groups mitigate the financial constraints of affiliated firms,and affect their financing policies.It aims to extend the evidence on internal capital markets to emerging countries where financing constraints are prevalent, and adds to the literature on trade credit by revealing that the distressed group-affiliated firms rely less on trade credit than their non-affiliated counterparts despite the positive relation between trade credit and distress. Group firms that have high investments in prior periods use less trade credit in the subsequent periods than non-affiliated firms. The study rests on panel data regressions covering 3906 firms from six emerging countries for the 2006-2012 period. The findings indicate that the Q-sensitivity of the investments of affiliated firms is lower than that of their unaffiliated counterparts in all countries and that the investment cash flow sensitivity of affiliates is lower in five countries, strongly indicating that group-affiliated firms are financially less constrained. The distressed group firms use significantly lower leverage than distressed unaffiliated firms despite the positive relation between distress and leverage. Group firms in high-Q industries invest less than unaffiliated firms. This paper contributes to the existing literature on internal capital markets by expanding the scope to emerging countries where market imperfections and financing constraints are more pronounced, and provides strong evidence for the role of business groups, prevalent in most emerging countries, in mitigating the constraints on the investments and financing choices of the group-affiliated firms.

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“…Regarding ii), Fluck andLynch (1999), Gertner, Scharfstein, andStein (1994), Matsusaka and Nanda (2002), and Rajan, Servaes, and Zingales (2000) study internal capital markets in conglomerates; Stein (1997) studies winner-picking skills; Gomes and Livdan (2004) and Maksimovic and Phillips (2002) study decreasing returns to scale. 8 We follow Bernardo and Chowdhry (2002) and Matsusaka (2001) in introducing a distinction between general and specific resources; such distinction does not, however, play as central a role in prompting diversification in our work as in theirs: diversification would occur in our model even absent general resources.…”

Section: Literature Reviewmentioning

confidence: 99%

Entrepreneurial Spawning and Firm Characteristics

2013

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We analyze the implications of entrepreneurial spawning for a variety of firm characteristics such as size, focus, profitability, and innovativeness. We examine the dynamics of spawning over time. Our model accounts for much of the empirical evidence relating to the relation between spawning and firm characteristics. Firms that have higher patent quality spawn more, as do firms that have higher knowhow. Older firms spawn less, they are more diversified and less profitable. Spawning frequency, focus, and profitability are positively related where spawning is driven by the value of organizational fit; they are negatively related with firm size.JEL classification: L25, M13, O31, O33.

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Why Do Firms Merge and Then Divest? A Theory of Financial Synergy

Cited by 200 publications

References 33 publications

Do financial conglomerates create or destroy value? Evidence for the EU

Do financial conglomerates create or destroy value? Evidence for the EU

Corporate Financial Constraints and Internal Capital Markets: Evidence from Emerging Countries

Entrepreneurial Spawning and Firm Characteristics

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