Does the Method of Corporate Diversification Matter to Firm’s Performance?

Ling-Foon Chan, Bany-Ariffin An and Annual Bin Md Nasir

A chapter in Asia-Pacific Contemporary Finance and Development, 2019, vol. 26, pp 207-233 from Emerald Group Publishing Limited

Abstract: Corporate diversification is a strategy that enables corporations to expand their core business into other businesses. In Malaysia, corporate diversification continues to represent a fundamental organizational structure. Some two-thirds of Malaysian firms are diversified. However, when compared to developed countries such as the US and the UK, we find that firms are moving toward non-diversification. The study is based on the population framework consisting of all of the public limited companies (PLCs) listed on the Bursa Malaysia stock exchange from 2007 to 2012. A dynamic panel model system generalized method of moments (GMM) was used to analyze the diversification and firm’s performance theories. The empirical findings demonstrated that diversification is better than non-diversification firms for the curvilinear relationship between diversification and firm’s performance (ROA and Tobin-Q) when using the entropy index and relatedness is taken into consideration. The research further concluded that related and unrelated diversification also has a positive relationship with performance, but diversification must be the dominant (focused) and cannot be too broad in nature. Diversification that is too broad may cause a positive relationship to turn in to a negative relationship toward performance in both related and unrelated instances of diversification.

Keywords: diversification; performance; related; unrelated; curvilinear; GMM; Tobin-Q; entropy; relatedness (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eme:isetez:s1571-038620190000026011

DOI: 10.1108/S1571-038620190000026011

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