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

Prior work has identified binding credit constraints during recessions. We assess whether corporate diversification alleviates these constraints. We use relative-to-industry growth in sales and growth in inventories as measures of a firm’s ability to fund its activities. We find that during recessions, industry-adjusted sales growth rates drop more for bank-dependent focused firms than for bankdependent diversified firms. This result holds after controlling for endogeneity of the diversification decision and survivorship bias. We find that inventory growth rates drop more for bank-dependent focused firms than for bank-dependent diversified firms during recessions even after controlling for contemporaneous growth in sales. Consistent with a credit constraint explanation, we document a larger drop in net debt issuances for bank-dependent focused firms during recessions. Overall, bankdependent diversified firms appear less credit constrained during recessions and consequently exhibit less cyclical behavior than bank-dependent focused firms.