Aggregate trade counterparty premium and excess value of diversification

Purpose This study examines the impact of the aggregate trade counterparty premium on the excess value of diversified firms, i.e. the value of diversified firms relative to imputed single-segment benchmarks. Design/methodology/approach Our study employs a panel dataset of US diversified firms from 2001 to 2023 to investigate the excess value implications of the aggregate trade counterparty premium. To address potential endogeneity, we estimate a range of alternative models, including fixed-effects regressions, Oster's coefficient stability test, impact threshold for a confounding variable benchmarks and a system-generalized method of moments framework. We further verify robustness by using an alternative measure of the excess value of diversification and excluding the crisis episodes. Findings A higher aggregate trade counterparty premium, reflecting elevated equity investor concern over customer turnover risk, is associated with higher excess value for diversified firms. These positive excess value implications are concentrated among firms without a deep diversification discount, suggesting that investors reward those firms that are capable of managing customer turnover risk through diversified operations. Cross-sectional analyses reveal that this positive association holds regardless of firm size, number of business segments or research & development intensity. Further evidence suggests that an elevated aggregate trade counterparty premium is associated with conservative internal capital allocations and higher earnings generation in diversified firms. Originality/value Our study highlights the macro-financial role of trade credit conditions in shaping investor perception of diversified firms and their value.