1: CORPORATE DIVERSIFICATION AND PERFORMANCE. This study by Wan Mohd Nazri Wan Daud, Norhana Binti Salamudin, Ismail Bin Ahmad (2009) determines the relationship between firm diversification and performance. A sample of 70 Malaysian firms is drawn from the industry during the period 2001 - 2005 for research. Panel data analysis is used for evaluating the relationship that exists between diversification and performance. The firms are classified as focused firms if the total sales of an industry are above 95%. The firms that do not meet this criterion were classified as diversified firms. Performance is used as dependent variable and diversification, Firm size, Inflation, leverage, and risk were used as independent and control variables. The findings show that the firms following focused strategy perform better than the firms following diversification strategy. Other measures of performance such as accounting measures and market measures used in the study showed some alternating results. The results show that firm size and leverage has a positive effect on performance. However; one interesting finding was risk is inversely proportional to return which means high returns can be associated with low risk. The study also demonstrates that inflation is inversely proportional to performance. Based on these results it was also found that accounting measure of performance is sensitive to firm size and risk whereas, market measure of performance is dependent on inflation and leverage.
2: DIVERSIFICATION AND FIRM PERFORMANCE IN AN EMERGING MARKET: THE TURKISH CASE
Arman T. Tevfik, Fuat Otkay (2008) used regression analysis to identify the relationship between diversification and firm performance in Turkey. A sample of 99 (ISE) Istanbul stock exchange firms is drawn from a total of 312 ISE firms for this study. Financial data pertaining to the year 2005 has been used for this study due to the lack of data because Istanbul stock exchange firms were not required to make consolidated financial statements. In the regression model diversification is used as an independent variable and performance is used as a dependent variable. Size and industry were used as control variables. The regression model developed is statistically significant and coefficients of independent variables effectively explain the variations in performance of a firm. The findings reveal that in Turkish market there is an inverse relationship between diversification and firm performance. The study also demonstrates the impact of size and industry on firm performance. Size and industry both have a positive effect on performance. Therefore, firms which are non diversified or less diversified perform better than the diversified firms in an emerging market like Turkey.
3: DIVERSIFICATION: VALUE-CREATING OR VALUE-DESTROYING STRATEGY? EVIDENCE FROM USING PANEL DATA
Antonio Galván, Julio Pindado, Chabela de la Torre used panel data analysis to demonstrate the relationship between diversification and firm value. A sample of 10 out of 12 euro zone countries is used for the purpose of this study and an excess value model is estimated by using generalized method of moments. For the purpose of checking the relationship between diversification and firm value excess value is regressed over Total Entropy and Revenue-based in Herfindahl index (Two measures of diversification). Control variables used for this study are investment level, profitability, debt ratio, dividends, intangible assets and firm size. The results show a curvilinear relation between diversification and excess value and that the diversification strategy first creates value and after a certain point it starts destroying it. There is an optimum level of diversification that can be reached which creates value for the firm but beyond that point the value starts to erode. The results also reveal that related diversification creates more value as compared to unrelated diversification.
4: INSTITUTIONAL OWNERSHIP, DIVERSIFICATION, AND RISK-TAKING IN BHCS
Saiying (Esther) Deng, Jingyi (Jane) Jia used simultaneous equation model and three-stage least squares (3SLS) to examine the relationship between diversification and risk for publicly traded bank holding companies. The role played by institutional ownership in risk effects of firm diversification is also examined. A sample of 98 BHCs, with 602 BHC-year observations is used for the purpose of study. Two simultaneous equations were used for different purposes i.e. (1A) for examining the effects of diversification on risk and (1B) for finding the impact of size and institutional ownership on firm's diversification. Firm size and capital ratio were used as control variables in the model. Other major risk categories like liquidity risk, credit risk, and off-balance-sheet risk were also placed in the model. The result showed some interesting facts i.e. revenue, geographic and non interest income activity diversification (RGNID) affiliates to lower risk taking of bank holding companies whereas, asset diversification is affiliated with higher risk taking of BHC. It was also found that larger institutional ownership is affiliated with high revenue, geographic and non interest income activity diversification or lower asset diversification suggesting that the managers are influenced by shareholders in diversification decision making and by this the shareholders negatively influence the risk taking of bank holding companies.
5: CORPORATE DIVERSIFICATION AND CREDIT RISK
Hsien-hsing Liao, Tzu-Ling Huang used probability to examine the effect of corporate diversification on credit risk by using data of diversified firms engaged in acquisitions and mergers during the period of 1998 - 2005. Securities Data Corporation's (SDC) Mergers and Acquisitions (M&A) Database was used for sample data collection during the period 1998 -2005. Sample is excluded if the acquirer firm and the target firm is in the same industry by two digit SIC code. Sample is also excluded if the acquirer firm is engaged in two or more M&A during a period of one year. After the initial screening a sample of 906 firms was obtained. By combining with the one year T-Bill rate the default probability of each firm is determined. The findings reveal that default probabilities of more risky firms decline when they diversify and that of the safe firms increases. The results also show that market value of equity is directly proportional to default probabilities. It was also found that the safe firms enjoy diversification premium whereas, the risky firms put up with diversification discount.
6: THE IMPACT OF DIVERSIFICATION ON FIRM PERFORMANCE AND
RISK: AN EMPIRICAL EVIDENCE
Ines Kahloul, Slaheddine Hallara (2010) used multivariate analysis to examine the impact of diversification on performance and risk. A sample of 69 non financial French firms is drawn quoted during the period 1995 - 2005. The data is extracted on the basis of Thompson Financial. The sample is based on a specific criteria i.e. size, period of 1995 -2005, industrial activity, quotation historic being sufficient on the whole period of the study. The diversification strategy of the firms is measured by Entropy index and the Herfindahl index. In the study performance is used as dependent variable and diversification, size, risk, debt, and growth are used as independent and control variables. A second model is developed by taking risk as the dependent variable while independent and control variables remained same (excluding risk from control variables). The findings show that there is a non linear relationship among diversification and performance. The relationship between diversification and risk is inversely proportional i.e. high diversification lesser risk. However, a strong positive relationship is examined between diversification and systematic risk.
7: DIVERSIFICATION AND FIRM PERFORMANCE: AN EMPIRICAL EVALUATION
Anil M. Pandya, Narendar V. Rao (1998) examined the relationship between diversification and firm performance by using analysis of variance (ANOVA) and other accounting and financial measures. A sample of 2188 firms was drawn by using Compustat database which were divided into three groups. Single product firm having SR > 0.95 (higher SR means low or no diversity), moderately diversified firms 0.5 ï‚£ SR ï‚£ 0.95, and highly diversified firms SR < 0.5. Only those firms were kept in the sample which remained in the same SR category for seven year period during 1984 - 1990. ANOVA could not be carried out on the sample data because the assumption of homogeneity of variance was not met, which was proved by conducting Hartley's test of equality of variance. Therefore only accounting measures were used to continue with the study. The results show that highly diversified firms have lower risk as compared to moderately diversified and single product firms, but, there average return on equity is lower than moderately diversified firms. However, the results also revealed that higher diversification mean greater average performance of the firm in terms of risk - return (C.V) basis.
8: THE EFFECTS OF FOCUS AND DIVERSIFICATION ON BANK RISK AND RETURN: EVIDENCE FROM INDIVIDUAL BANK LOAN PORTFOLIOS
Viral V. Acharya, Iftekhar Hasan (2001) used regression analysis, return measures, and seemingly unrelated regression (SUR) to identify the effect of focus and diversification on bank risk and return. A sample of 105 Italian banks is used for the purpose of study. The data pertaining to the period 1993 -1999 is used. Data is collected from Central bank of Italy, Association of banker's of Italy (ABI), and Fondo Interbancario di Tutela dei Deposita (FITS). Focus/diversification is measured by using Hirschman Herfindahl Index (HHI). A regression model is developed by using size, equity ratio, branch ratio, and employee ratio as control variables. Diversification/focus is used as independent variable and return/risk as dependent variable. To check the robustness of the test both risk and return are used as endogenous variables and are simultaneously estimated by using seemingly unrelated regression (SUR). The findings show that industrial diversification decreases performance for moderately risky and highly risky banks. Sectoral diversification decreases performance for highly risk banks its effect on moderately risky banks is ambiguous. Geographic diversification improves performance for moderately risky banks but its effect on highly risky banks is ambiguous. It was also found that industrial and sectoral focus reduces risk and geographic focus increases risk.
9: TOBIN'S Q, CORPORATE DIVERSIFICATION, AND FIRM PERFORMANCE
Larry H. P. Lang, Rene M. Stulz (1994) used mean, median, standard deviation, and regression analysis to identify relationship between Tobin's q, corporate diversification and performance. A sample of 1449 is drawn by using Compustat for the measurement of mean, median and SD of Tobin's q and number of segments whereas, a sample size of 1420 is used for measuring mean, median, and SD of herfindahl from sales and herfindahl from assets. Spearman's rank correlation is used to find the correlation among variables and it is found that Tobin's q is strongly negatively correlated with the degree of firm diversification. It was also found that the degree of diversification decreases with an increase in herfindahl index and they are negatively correlated similarly the degree of diversification increases with increase in number of segments therefore correlation is positive. These correlations are significant at 99% confidence interval. The results also demonstrated that highly diversified firms have lower mean and median q ratios as compared to single product firms. Moreover an inverse relationship was found between diversification and performance however, the firms that pursue related diversification have a comparative advantage over the firms having unrelated diversification.
10: EFFECT OF PRODUCT MARKET DIVERSIFICATION ON FIRM PERFORMANCE: A STUDY OF THE INDIAN CORPORATE SECTOR
Vardhana Pawaskar (1999) examined the relationship between diversification and performance. Threshold regression model is used for the purpose of this study. A sample of 524 Indian private sector manufacturing firms is analyzed over the period from 1992 - 1995. Data is extracted from Corporate Information on Magnetic Medium (CIMM) and only those firms were selected which are listed in Mumbai stock exchange (MSE). Age of firm, growth rate, excess value, and risk are used as control variables. BH&N (Measure of diversification) is used as independent variable and performance as dependent variable. The results reveal that the estimated coefficients on the risk, asset utilization ratio and growth of the primary industry are all insignificant. The coefficient of age of the firm is highly significant and is inversely proportional to firm's performance. It is also concluded that any improvement in firm's performance by using diversification depends mainly on its asset utilization. If the firm can best utilize its asset in present operations then related diversification will improve performance. However, if the firm cannot effectively utilize its asset than unrelated diversification is a better choice.
11: INTERNATIONAL DIVERSIFICATION AND FIRM PERFORMANCE: THE S-CURVE HYPOTHESIS
JANE W. LU, PAUL W. BEAMISH (2004) used general linear squares and other accounting and market measures to examine the relationship between internationalization, diversification and performance of the firm. A sample of 1489 Japanese firms was used over a period of 12 years for the purpose the study. Corporate finance was used as dependent variable. Return on asset is used as accounting measure and Tobin's q is used as a market measure. Data for Tobin's q was obtained from NEEDS tapes and the PACAP database. Performance implications of internationalization are examined using a firm year unit of analysis and for the performance analysis general least squares technique is used. Random effect models were compared to fixed effect model by the use of Hausman test. The findings reveal that there is a non linear relationship between performance and geographic diversification i.e. increase in geographic diversification results in decrease in performance of the firm.
12: THE EFFECT OF DIVERSIFICATION ON PERFORMANCE REVISITED
Juan Santalo, Manual Becerra (2004) examined the relationship existing between diversification and performance of the firm. The study is used for the purpose of explaining that impact of diversification on performance is not homogenous across all industries. Regression model is applied on the data for the purpose of study. Sample data is extracted by using Compustat. The findings show that there is a curvilinear relationship diversification and performance. Subsample analysis is used to test this curvilinear relationship between diversification and firm performance. The results show the usual non linear relationship between diversification and firm performance. However, if the impact of diversification on performance is estimated for industry having less than five specialized firms significant diversification premium is found. Therefore, negative relationship between performance and diversification is not found in the industries having very few specialist firms and the diversified firms perform better than specialist firms in these industries.
13: A BEHAVIORAL MODEL OF DIVERSIFICATION AND PERFORMANCE IN A MATURE INDUSTRY
John D. W. Morecroft used simulation experiments to study the relationship existing among diversification and firm performance. Four assumptions were used A) diversification takes place when existing markets become less profitable. B) Relative performance is dependent upon complex managerial judgement. C) Management's perception of the future firm performance depends upon optimism, foresight and persistence. D) The faster the rate of diversification the lower is the rate of core and non core business activity performance. These four assumptions were formed on the basis of previous studies that were took under consideration. The experiments show that if the firm has no option to diversify and it faces a drop in industry demand then in order to increase returns the firm should use its resources effectively. In the second and third experiment the firm faces a drop in industry demand but has the option of diversification, the firm faces a loss mainly due to the disruptions caused by diversification and partly due the fact that core business is downsized in order to meet expected returns.
14: MEASURING THE IMPACT OF GLOBALIZATION: AN ANALYSIS OF THE RISK AND RETURN OF MULTINATIONAL FIRMS
Charlotte B. Broaden, Massood V. Samii (2001) investigated the effects of multinational firms on their risk and returns. A sample of 103 randomly selected US firms having a net income of over 1,000,000$ for the period of this study. Firms used in this study had a least 10 % of their sales originating overseas. Data is examined using pooled cross-section-time series regression process. Return is used as dependent variable and FATA, FSTS, and the average of the two is used as the independent variable. Results of pooled least square regression were statistically significant and showed that there is a non linear relationship between internationalization and profitability. It is also found that as internationalization is increased the debt is decrease i.e. there is an inverse relationship between internationalization and debt. The study also shed light on the fact that as internationalization is increased the systematic risk is also increased i.e. there is a positive relationship.
15: FOREIGN DIRECT INVESTMENT, DIVERSIFICATION AND FIRM PERFORMANCE
In this paper John A Doukas, LHP Lang (2003) examined whether firms that begin new plants in foreign countries recognize comparable gains from core-related & non-core-related investment transactions. Particularly, we examine whether geographic diversification is more profitable for firms that expand their center business than for firms that expand their non-core business. Our data points out that firm attain higher gains from international diversification when they engage in core-related Greenfield investment transactions. The sample used in this study consists of US firms that announced new foreign plants over the period 1980-1992.We use three keywords -foreign, plant and investment to identify foreign investment transactions. This search initially resulted in 435 transactions. This sample includes specific investment transactions also. To assess the effects of foreign direct investment decisions on share prices, the abnormal returns of US investing firms are computed using standard event-study methodology. Our findings support the view that foreign investments that increase the industrial diversification of the firm tend to exacerbate its (1) existing operating inefficiencies and (2) negative synergies among different segments of the firm, resulting in short-term and long term losses. Hence unrelated geographic diversification bears strongly against the forecast of the internalization hypothesis. We also find whether international diversification is more valuable to single-segment or multi-segment firms and how it affects their post-investment performance. The evidence shows that both specialized and diversified firms get benefit from focused international investments, whereas diversifying international investments are more harmful to specialize than diversified firms. We discover the international investment gains, though, to be considerably larger for the concentration on investments of diversified firms than those of particular firms. Our data also shows that the international investment gains of focused investments are large for both specialized and diversified firms that invest in new markets.
16: THE EFFECT OF DIVERSIFICATION ON FIRM PERFORMANCE
Mark Rogers (2001) examined effect of diversification on performance. Data is extracted from IBIS database, which consists of financial information on medium to large Australian firms. A subset of the firms in the database provides segment-based information on industrial or international diversification. Since the focus of this paper is on diversification, only firms that report segment level data are used in experimental analysis. The segment data, which are available for the period 1994 to 1997, include revenue, assets and profit. In summary, the finding that it is only in the full sample that more focused firms are more profitable suggests 3 possible explanations by using regression analysis: (1) low profitability firms diversify in search of higher profits, (2) firms view diversification as a means to reduce risk and accept lower mean profitability as a result, or (3) management preferences for growth or other objectives cause some firms to diversify. The lack of any diversification-performance relationship in the market value regressions, and the weaker diversification profitability relationship found in the sub-sample of listed firms, shows that the management of quoted firms may be under more scrutiny or competitive pressures, hence it may be that (3) is more likely.
17: HOME COUNTRY ENVIRONMENTS, CORPORATE DIVERSIFICATION STRATEGIES, AND FIRM PERFORMANCE
In this study William P. Wan reinvestigates the association between corporate diversification plans and firm performance and advices that these associations are related to home country environments. We investigated 2 environmental aspects: 1) factors which facilitate transformational activities and 2) institutions which foster transactional activities. Using a sample of firms from 6 Western European countries, we found support for the paper's central proposition that home country environment is a major element in the study of corporate diversification plans. Each model was tested by using OLS regression. The means, standard deviations, and inter-correlations for the variables used for the 2 groups of country environments are separately presented. There was no multi-co linearity problem because no variance inflation factor is greater than 10 and the mean of all the variance inflation factors was not considerably larger than 1. The standard errors reported below are heteroscedasticity-consistent White's standard errors. The overall outcomes imply that the benefits of this plan seem to be limited to high product diversified firms, which usually are more leading and influential in these environments. We also found that high product diversified firms in more generous environments perform worse when they diversify internationally. Our overall findings show that focused firms in these environments enjoy the benefits of outbound international diversification whereas high product diversified firms suffer from such a plan. Lacking superior product market capabilities, high product diversified firms would find it difficult to compete globally.
18: THE IMPACT OF DIVERSIFICATION ON THE PERFORMANCE OF UK
CONSTRUCTION FIRMS (Wan Mohd Nazri Wan Daud, 2009)
Yahaya M. Ibrahim, Ammar P. Kaka (2007) investigated the relationship between diversification and firm performance of UK construction firms. A sample of 23 firms has been used for the purpose of study. Different accounting measures of return were used for this study such as ROE, ROTA, and ROCA. The 23 firms selected as sample for the study were sub divided into three groups. 9 undiversified firms with SR > 0.95, 10 moderately diversified firms with 0.7 < SR < 0.95, and 4 highly diversified firms with SR < 0.7. SR represents specialization rate i.e. higher SR rate mean lower diversification. After applying the four accounting ratios the results show no difference in undiversified and moderately diversified firms on the basis of ROE and they both outperform highly diversified firms, similar is the case for ROCA. Results based on ROTA states that focused firms outperform both moderately and highly diversified firms. Based on PM the results show that undiversified firms outperform both moderately and highly diversified firms but there is no difference between moderately and highly diversified firms.
19: FIRM CAPABILITIES AND DIVERSIFICATION: HOW MISSION MATTERS
Mohammad Pakneiat, Monireh Panahi, Javad Noori (2010) examined the effect of diversification and firm capabilities. The study is based on Khodro an Iranian based car manufacturer which is the largest in North Africa and Middle East. In this study light has been shed on previous studies based on the fact that unrelated diversification is present in late industrialization firms. During the study it was expected that contact capabilities of firms lead to unrelated diversification and technological capabilities lead to related diversification but results obtained were contradictory with these assumptions. Results reveal that firm's approach to its mission can highly influence its strategy to diversify. It also showed that mission development is one of the most important factors that effect firm's diversification and its capabilities.
20: FOREIGN DIVERSIFICATION VS CONCENTRATION STRATEGIES AND FIRM
PERFORMANCE
Francisco J. Mas, Juan L. Nicolau, Felipe Ruiz (2004) examined the effect of concentration strategies, diversification on firm performance. Moderated regression model is used for the purpose of this study. A sample of 36 Spanish quoted firms is used for this study. The data is extracted from BARATZ database and a sample of 126 expansion announcements by 27 firms which follow diversification strategy was found. Similarly a sample of 23 announcements by 9 firms which follow concentration strategy was found. Concentration/diversification is used as independent variable. Jaffe test and Corrado test were also used for testing the significance of excess returns. There is a positive relationship between international diversification and firm's performance i.e. increases in international diversification results in an increase in firm's performance. The main implications of these outcomes for managers in firms that spread out abroad is that they should not be concerned with foreign concentration/diversification.
