Corporate Diversification, Economic Policy Uncertainty and Firm Financial Outcomes: The Global Evidence

Abstract

This thesis investigates the role of corporate diversification on the effect of economic policy uncertainty (EPU) on firm value and investment in a cross-country setting. Moreover, it also examines whether cash holdings mediate the association of EPU with corporate leverage. The sample constitutes publicly listed companies from 22 countries. For empirical analysis, ordinary least square (OLS) regression model is employed as the baseline model, including controlling for the time, industry, and country heterogeneity. The overall findings of the thesis are obtained from three different studies. The results from the first study illustrate that corporate diversification alleviates the negative impact of high uncertainty on the firm value by efficiently mitigating the financial constraints. Further, additional analysis shows that in developed economies, both related and unrelated corporate diversification can be instrumental in mitigating the negative impact of high EPU on firm value, whereas in emerging economies, only unrelated diversification is effective to deal with high EPU. The second study explore the moderating role of corporate diversification between economic policy uncertainty (EPU) and corporate investment relationship. Using firm level panel data of firms from 22 countries over the period 2000-2020, results show that corporate diversification positively moderates the negative impact of EPU on corporate investment. Further analysis checked the joint effect of EPU and diversification across developed and emerging economies and found that the effect of related diversification is more pronounced in developed markets than in emerging markets, whereas, for unrelated diversification, the effect is more pronounced in emerging markets than in developed markets. Moreover, the positive effect of diversification on the EPU-investment relationship is captured through mitigating financial constraints. In additional investigation the results in the U.S. context found consistent with results obtained from the global sample. The third study examine the mediating role of cash holdings in the EPU-leverage relationship. Using stepwise regression analysis, the results provide novel evidence that cash holdings significantly and partially mediate the EPU-leverage relationship, accounting for a 10.72% increase in the EPU effect on corporate leverage. Further results show that the mediating role of cash holding between EPU, and leverage is sensitive to firm-level heterogeneity. In an additional analysis, results show that the mediating channel of cash holdings remains significant using both long and short-term leverage. Moreover, EPU is found to have a positive impact on both long-term and short-term leverage. However, the extent of significance is more promising for long-term leverage during high EPU. Finally, the findings are robust to outliers’ effect, alternate EPU measurement, endogeneity concerns, and sample-selection bias.