Diversification and firm performance: the moderating influence of ownership structure and business group-affiliation.

Abstract

Investigations into the relationship between corporate diversification and firm performance represent one of the most actively investigated areas in the fields of strategy and finance. However, despite the enormous interest in the field, the debate on whether corporate diversification creates or destroys value remains inconclusive with several studies offering differing results on the phenomena among different institutional contexts. Moreover, much of the earlier empirical research has exclusively focused on merely examining the influence of various diversification measures on firm performance. This study examines the diversification-performance relationship by extending these prior studies by explicitly analyzing the impact of ownership structure and business group-affiliation in influencing this relationship. These differences in ownership structure and business group-affiliation have generally been ignored by much of the prior research in this area. Utilizing the theoretical underpinnings of agency and resource-based perspectives, hypotheses are formulated which postulate a differential influence of the impact of corporate diversification on firm performance depending on the firms ownership structure and group-affiliation. In a nutshell, the paper attempts to bring together two broad literature streams: one examining corporate governance characteristics such as ownership structure and business group affiliation; and second examining diversification-performance issues with the overall objective of attaining a more composite understanding of a strategic decision of valid import, namely corporate diversification