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RFS Advance Access published online on February 21, 2006
Review of Financial Studies, 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

Article

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

Valentin Dimitrov 1 * and Sheri Tice 2
1 Rutgers University, Newark
2 Tulane University

* To whom correspondence should be addressed.
Valentin Dimitrov, E-mail: vdimitr{at}business.rutgers.edu


  Abstract

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.


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