Manager‐specific shocks, financial constraints and conglomerate merger

Abstract

AbstractWe provide a theory to identify a new benefit for conglomerate mergers. In this paper, projects are subject to manager‐specific shocks. Bringing projects under the same top management in a conglomerate increases the correlation of shocks. We show that this positive correlation, in contrast to traditional wisdom, enhances a firm's ability to relax financial constraints. This is because common managerial shocks help conglomerates better take advantage of cross‐pledging possibilities. This paper also contributes to the literature by providing one of the first studies to emphasize the role of manager‐specific shocks in shaping a firm's choice to be a conglomerate or standalone.