Inefficient Labor or Inefficient Capital? Corporate Diversification and Productivity around the World

Todd Mitton

Journal of Financial and Quantitative Analysis, 2012, vol. 47, issue 1, 1-22

Abstract: I study the relation between corporate diversification and labor productivity in a sample of over 500,000 firms from 46 countries. Across the entire sample, greater diversification is associated with significantly lower labor productivity. The negative relation between diversification and labor productivity is not stronger in countries with more burdensome employment regulation, but it is significantly stronger in countries with better financial development. In addition, the negative relation is stronger in industries with high capital/labor ratios. Overall, the results suggest that the lower productivity in diversified firms is due more to the misallocation of capital than to the inefficient use of labor.

Date: 2012
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