Cash Holdings and Corporate Diversification: Evidence From Nordic Companies

Abstract

We examine the relationship between diversification and corporate liquidity in Nordic firms. The significant findings of this paper show that multidivisional firms hold less cash relative to their stand-alone counterpart due to diversification in their investment opportunities and cash flows. Mainly through a higher correlation between investment opportunity and cash flow, but also higher cross-divisional correlations in cash flow results in lower cash holdings, even after controlling for determinants such as cash flow volatility. Furthermore, we find that the most substantial effects apply to firms that are financially constrained. As a whole, the results provide an efficient link between corporate liquidity and diversification in the Nordic universe.