Manager-specific shocks, financial constraints and conglomerate merger

We provide a theory to identify a new benefit for conglomerate mergers. In this paper, projects are subject to manager-specific shocks. Bringing projects under the same top management in a conglomerate increases the correlation of shocks. We show that this positive correlation, in contrast to traditional wisdom, enhances a firm's ability to relax financial constraints. This is because common managerial shocks help conglomerates better take advantage of cross-pledging possibilities. This paper also contributes to the literature by providing one of the first studies to emphasize the role of manager-specific shocks in shaping a firm's choice to be a conglomerate or standalone.