Abstract

This study analyses the market performance of U.S. conglomerates during economic downturns, focusing on the benefits of diversification and Internal Capital Markets (ICMs). Spanning from 2000 to 2022, the research demonstrates that diversified conglomerates consistently outperform the market in recessions. The key finding is that ICMs act as alternative capital sources, facilitating resource reallocation and mitigating financial constraints in external markets, thereby enhancing conglomerate performance during downturns. Challenging the traditional view of a ‘conglomerate discount’, the paper highlights the overlooked strategic advantages of conglomerate structures, particularly during adverse economic conditions. The empirical analysis reveals that conglomerates, through diversification and effective use of ICMs, achieve reduced return variability and better investment opportunities, leading to market outperformance. In summary, the study offers new insights into the rationale behind conglomerate structures, underscoring their resilience and strategic advantage in economic downturns, and contributes to a more nuanced understanding of the ongoing adoption of diversification strategies by companies.