The Industry Life Cycle and Acquisitions and Investment: Does Firm Organization Matter?

We examine the effect of financial dependence on the acquisition and investment of singlesegment and conglomerate firms at different stages of the industry life cycle. Conglomerates and single-segment firms differ in acquisition activity more than in the level of capital expenditure across all stages. Financial dependence, a deficit in a segment’s internal financing, decreases the likelihood of acquisitions and opening new plants, especially for single-segment firms. In growth industries, these effects are mitigated for conglomerates and public firms. In declining industries, plants of segments that are financially dependent are less likely to be closed by conglomerate firms. These findings persist after controlling for public status, firm size and segment productivity. We also find that plants acquired by conglomerate firms in growth industries increase in productivity post-acquisition. The results are consistent with the conclusion that the comparative advantages of different firm organizations differ across the industry life cycle. First version: January 2004 This version: November 2004 ∗University of Maryland and University of Maryland and NBER respectively. Maksimovic can be reached at [email protected] and Phillips can be reached at [email protected]. This research was supported by the NSF. We would like to thank Mike Lemmon and seminar participants at the Duke-UNC corporate finance conference, Case Western, HKUST, Minnesota, Pittsburg, Texas, UBC and UCLA. We would also like to thank the researchers and staff of the Center of Economic Studies where this data used in this research resides. We alone, however, are responsible for the conclusions and analysis in this paper. The Industry Life Cycle, Acquisitions and Investment: Does Firm Organization Matter?