Permanent working papers:
Core-business Expertise, Managerial Discretion and Corporate Diversification, May 2010
Abstract: I test the hypothesis that diversification destroys value because managers lack expertise outside the core business. I develop diversification measures that capture both the importance of non-core business activity (sales-shift) and the unrelatedness to core-business (distance-to-core). I test two main implications: firms with more business activities outside the core business have lower value and the discount should be greater for firms with more activity in unrelated-to-core secondary segments. The evidence supports both hypothesis. I test more directly if the results are linked to a lack of managerial expertise by using an industry index of managerial discretion. I find that increasing non-core business sales weight by 10% decreases firm value up to 3%, if the firm has high managerial discretion. Finally I find no compensation premium for diversified firms and a positive correlation between managerial discretion and CEO compensation.
Cash Holdings and Business Conditions, with Miguel Ferreira and Clara Raposo, 2005
Abstract: We investigate the relation between business conditions and corporate liquidity decisions by US firms. We find strong evidence that financially constrained firms hold more cash during recessions and that business conditions are significant to constrained firms’ cash decisions. In contrast, we find weak evidence that financially unconstrained firms adjust cash holdings according to the business cycle. This asymmetric behaviour is more pronounced for changes in the short-term interest rate. Moreover, we find that firms increase the level of liquidity during periods of tighter credit conditions. Our findings support both the precautionary motive for holding cash and the pecking order theory.
link to ssrn: here