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RFS Advance Access originally published online on February 21, 2006
Review of Financial Studies 2006 19(4):1465-1498; doi:10.1093/rfs/hhj028
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© The Author 2006. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org

Corporate Diversification and Credit Constraints: Real Effects across the Business Cycle

Valentin Dimitrov
Rutgers University

Sheri Tice
Tulane University

Address correspondence to Valentin Dimitrov, Rutgers Business School, Rutgers University, Newark, NJ 07102, or e-mail: vdimitr{at}business.rutgers.edu.

We study whether differences in access to credit cause focused firms to perform differently from diversified firms in the product market. Prior work has identified binding credit constraints for bank-dependent firms during recessions. We assess whether corporate diversification alleviates these constraints. We find that during recessions sales growth rates drop more for bank-dependent focused firms than for rival segments of bank-dependent diversified firms. We also find that during recessions inventory growth rates drop more for bank-dependent focused firms than for bank-dependent diversified firms even after we control for contemporaneous sales growth. Consistent with a credit constraint explanation, we find no difference in the sensitivities to recessions of bank-independent focused and bank-independent diversified firms. (JEL G30, G31, G32)


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