In this paper, we examine the workings of internal capital markets in diversified firms that engage in related and unrelated corporate acquisitions. Our evidence indicates that bidders invest outside their core business (diversify) when the cash flows of their core business fall behind those of...

We study the impact of diversification on firm cash flows and excess value. Specifically, we investigate whether there is a direct link between the discount to diversification and excess cash flow reductions around related and unrelated acquisitions. Our results provide empirical support for a...