Review of Managerial Science

, Volume 8, Issue 2, pp 145–174 | Cite as

Agency costs of free cash flow, internal capital markets and unrelated diversification

  • Raffaele StaglianòEmail author
  • Maurizio La Rocca
  • Tiziana La Rocca
Original Paper


This paper investigates whether free cash flow arguments or the internal capital market perspective better explains diversification decisions. Based on a unique panel of hand-collected data from listed and unlisted Italian firms for the 1980–2010 time period, the results of this study generally reveal the predominant role of the internal capital market arguments. The benefits of unrelated diversification, which include the avoidance of costly external financing, outweigh its costs, which involve opportunistic problems. Although the literature suggests two distinct forces concurrently affect diversification decisions, in the Italian context, financial benefits appear to be the prevailing motivation for unrelated diversification decisions. Furthermore, the internal capital market argument has a strong effect on decisions to engage in unrelated diversification, particularly with respect to firms that are sensitive to financial constraints.


Agency costs of free cash flow Internal capital markets Corporate diversification Relatedness 

JEL Classification

G30 G34 



The authors are grateful for the especially helpful comments from the Editor, two anonymous referees and the discussants and seminar participants at the 2008 and 2009 European Financial Management Association (EFMA) Meetings, the 2008 Financial Management Association (FMA) Meeting, the Brown Bag Seminar of the University of Calabria (Italy), the 2010 European Academy of Management (EURAM) and the 2009 PhD Research Workshop of Université de Toulouse 1 Capitole (France).


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Copyright information

© Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

  • Raffaele Staglianò
    • 1
    Email author
  • Maurizio La Rocca
    • 2
  • Tiziana La Rocca
    • 3
  1. 1.Department of Law Accounting and FinanceGroupe Sup de Co Montpellier Business School, Montpellier Research in ManagementMontpellierFrance
  2. 2.Department of Business ScienceUniversity of CalabriaArcavacata di RendeItaly
  3. 3.Department of Economics, Business, Environment and Quantitative MethodsUniversity of MessinaMessinaItaly

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