We examine whether organizational form matters for a firm's cost of capital. Contrary to the conventional view, our model shows that coinsurance among a firm's business units can reduce systematic risk through the alleviation of countercyclical deadweight costs. Using measures of implied cost of capital constructed from analyst forecasts, we find that diversified firms have on average a lower cost of capital than stand-alone firms. In addition, diversified firms with less correlated segment

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... flows have a lower cost of capital, consistent with a coinsurance effect. Holding the magnitude of cash flows constant, our estimates imply an average value gain of approximately 6% when moving from the highest to the lowest cash flow correlation quintile. , 2005, Properties of implied cost of capital using analysts' forecasts, Working paper, MIT. Higgins, Robert C., and Lawrence D. Schall, 1975, Corporate bankruptcy and conglomerate merger, Journal of Finance 30, 93-113. Jegadeesh, Narasimhan, and Sheridan Titman, 1993, Returns to buying winners and selling losers: Implications for stock market efficiency, Journal of Finance 48, 65-91. Jensen, Michael C., 1986, Agency costs of free cash flow, corporate finance, and takeovers, American Economic Review 76, 323-329. Kaplan, Robert S., and Gabriel Urwitz, 1979, Statistical models of bond ratings: A methodological inquiry.