Diversifikasi korporasi dan biaya modal

Abstract

This paper studies the relation between corporate diversification and cost of capital. It examines whether cost of capital is affected by an organizational form under various levels of financialconstraints and cash flow correlations. The sample was takenacrossnon-financial sectorslisted onthe Indonesian Stock Exchange(IDX) over the period 2010-2014. Feasible Generalized Least Square (FGLS) is used to test the hypotheses. The findings showthat a firm’s cost of capital is positively affected by the level of corporate diversification. However, the result of a separate regression shows a dual effect of corporate diversification on cost of debt and cost of equity. Another key finding, lower cash flow correlations between business segments, corresponds to lower cost of capital, which supports the co-insurance hypothesis. The less correlated the cash flows, the greater the co-insurance effect would be generated, reducing a firm’s cost of capital. In addition, when the sample is divided between financially and non-financially constrained firms, the results show a significant effect only in financially constrained firms. It indicates that the influence of diversification on firm’s cost of capital ismore pronounced for financially constrained firms. Keywords:cash