Diversification, Performance, and the Corporate Life Cycle

Jonchi Shyu and Yen-Luan Chen

Emerging Markets Finance and Trade, 2009, vol. 45, issue 6, 57-68

Abstract: This paper investigates the relation between the extent of diversification in firms and their performance at different life cycle stages. To illustrate the joint endogeneity of diversification and performance, we treat both the extent of diversification and firm performance as endogenous variables in a simultaneous equation system. Empirical results reveal that corporate diversification erodes firm value. Overall, firms in their growing stages experience a significant diversification discount; however, mature firms do not show such findings. Although unrelated diversification leads to trading at a discount in all growing and mature firms, conversely, related diversification exhibits an evident premium in mature firms.

Keywords: corporate life cycle; joint endogeneity; related/unrelated diversification (search for similar items in EconPapers)
Date: 2009
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