Does conglomeration really reduce credit risk?


  • I thank Malte Brockmann, Jens Burchardt, Andreas Hackethal, Ulrich Hommel, Ian MacMillan and seminar participants at European Business School and the University of Pennsylvania for helpful comments. I am grateful for the access to bankruptcy data provided by Edward Altman and acknowledge financial support from the Institut de Finance Mathématique de Montréal (IFM2). Forough Ensandoust-Ghazvini provided valuable research assistance.


I quantify the effects of conglomeration on credit risk by first computing theoretical default probabilities for conglomerates and their hypothetical stand-alone counterparts and then mapping them into physical probabilities using a comprehensive database of corporate failures. Comparing the credit risk of conglomerates with that of hypothetical stand-alone firms, I report significant reductions in the annual probability of default for small firms. My results support the proposition that managers can have a strong incentive to engage in conglomeration, even if it reduces shareholder value and show for which firms this is the case.